Briefly: In our opinion, short (full) speculative positions in gold, silver and mining stocks are justified from the risk/reward point of view.
Gold has been recently moving in the opposite direction to what we saw in the general stock market, but the strength of this relationship has weakened. This can tell us something about the next move in gold. Let’s take a closer look (charts courtesy of http://stockcharts.com).
We were recently asked if gold’s negative correlation with the general stock market is a bullish factor for gold. Generally, we don’t think so, because it seems likely to us that the general stock market will move higher relatively soon (waiting for a bullish confirmation before opening long positions might be a great idea, though).
Most importantly, though, the way that the correlation between gold and the S&P 500 Index behaves right now has bearish implications on its own. The reason is that ever since the entire medium-term decline began (2011), each time when the mentioned correlation moved very low and then corrected to about -0.25 (like it is the case today), a decline followed. This was the case immediately on most occasions – except for the time when gold still declined, but we had to wait for this decline several additional days (this situation took place when stocks were rising, not when they were declining, like they are right now).
The implications of the above are bearish for the precious metals sector.
Gold moved lower yesterday and it’s moving lower in today’s pre-market trading. The important thing is that the move above the 50% Fibonacci retracement level was invalidated, just like it was the case in May 2015. The volume was not huge, but that’s not an important issue because we saw the similar thing very often right after the tops – the volume during declines was relatively low at the beginning and it increased as the decline progressed. October 2015 and January 2015 serve as good examples.
Silver’s chart had very bearish implications and it continues to have them today and the main reason is the rally right before the cyclical turning point and a reversal at it. Consequently, our yesterday’s comments remain up-to-date:
Silver moved higher right at the cyclical turning point, which has bearish implications. If silver is truly in an early phase of a major move higher, then it would be something against practically all similar cases in the recent past. Please note that silver’s sharp rallies at or close to the cyclical turning points were always followed by significant declines and each of them was bigger than silver’s recent move higher. Is silver’s yesterday’s rally really bullish? No.
The implications remain bearish.
Miners have not declined very significantly yet, but we saw similar action earlier this year. After the first January top, GDX declined just a bit – only erasing the previous sessions’ gains. The same happened yesterday. Overall, we think there was no bullish implications of yesterday’s session and our previous comments remain up-to-date:
(…) the sizes of the moves were not very significant and the rally above the 50-day moving average is quite in tune with the previous January 2015 move higher. Moreover, since the move was not significant, we continue to view the current move higher as similar to the previous attempts to break above the 50-day moving average. (…) We marked the similar situations in red. In August 2015, September 2015, December 2015 and earlier in January 2016 we saw breakouts above the 50-day moving average that were similar to the current one and the size of the volume was very similar as well. What happened next? Mining stocks declined – if not right away than within the following couple of days.
There was only one time when mining stocks truly broke above the 50-day moving average and that was in early October 2015. The session when we saw this breakout was not similar to yesterday’s session – the size of the rally and the volume that accompanied it was much bigger than what we saw yesterday.
There were also 2 other attempts to move above the 50-day moving average that were not successful, but their implications are only a little bearish, because the volume was not similar to what we saw yesterday.
Overall, a rally on sizable volume is generally a bullish event in any market, but based on what followed similar sessions (and the small breakouts above the 50-day moving average) we don’t view it as such. In fact, one can say that the implications are bearish for the short-term (but rather nonexistent for the immediate-term).
Summing up, we finally saw some declines yesterday and it appears that, based on multiple factors featured this week, the decline in the precious metals sector is starting. Most importantly, the bearish factors (the ones that we covered in greater detail yesterday and on Wednesday) remain unchanged and continue to suggest that much lower precious metals prices will be seen.
As always, we will keep you – our subscribers – updated.
To summarize:
Trading capital (our opinion): Short positions (full) in gold, silver and mining stocks are justified from the risk/reward perspective with the following stop-loss orders and initial target price levels:
- Gold: initial target price: $973; stop-loss: $1,143, initial target price for the DGLD ETN: $117.70; stop-loss for the DGLD ETN $74.28
- Silver: initial target price: $12.13; stop-loss: $14.83, initial target price for the DSLV ETN: $101.84; stop-loss for DSLV ETN $57.49
- Mining stocks (price levels for the GDX ETF): initial target price: $10.23; stop-loss: $15.47, initial target price for the DUST ETF: $31.90; stop-loss for the DUST ETF $10.61
In case one wants to bet on junior mining stocks' prices (we do not suggest doing so – we think senior mining stocks are more predictable in the case of short-term trades – if one wants to do it anyway, we provide the details), here are the stop-loss details and initial target prices:
- GDXJ ETF: initial target price: $15.23; stop-loss: $21.13
- JDST ETF: initial target price: $52.99; stop-loss: $21.59
Long-term capital (our opinion): No positions
Insurance capital (our opinion): Full position
Plus, you might want to read why our stop-loss orders are usually relatively far from the current price.
Please note that a full position doesn’t mean using all of the capital for a given trade. You will find details on our thoughts on gold portfolio structuring in the Key Insights section on our website.
As a reminder – “initial target price” means exactly that – an “initial” one, it’s not a price level at which we suggest closing positions. If this becomes the case (like it did in the previous trade) we will refer to these levels as levels of exit orders (exactly as we’ve done previously). Stop-loss levels, however, are naturally not “initial”, but something that, in our opinion, might be entered as an order.
Since it is impossible to synchronize target prices and stop-loss levels for all the ETFs and ETNs with the main markets that we provide these levels for (gold, silver and mining stocks – the GDX ETF), the stop-loss levels and target prices for other ETNs and ETF (among other: UGLD, DGLD, USLV, DSLV, NUGT, DUST, JNUG, JDST) are provided as supplementary, and not as “final”. This means that if a stop-loss or a target level is reached for any of the “additional instruments” (DGLD for instance), but not for the “main instrument” (gold in this case), we will view positions in both gold and DGLD as still open and the stop-loss for DGLD would have to be moved lower. On the other hand, if gold moves to a stop-loss level but DGLD doesn’t, then we will view both positions (in gold and DGLD) as closed. In other words, since it’s not possible to be 100% certain that each related instrument moves to a given level when the underlying instrument does, we can’t provide levels that would be binding. The levels that we do provide are our best estimate of the levels that will correspond to the levels in the underlying assets, but it will be the underlying assets that one will need to focus on regarding the sings pointing to closing a given position or keeping it open. We might adjust the levels in the “additional instruments” without adjusting the levels in the “main instruments”, which will simply mean that we have improved our estimation of these levels, not that we changed our outlook on the markets. We are already working on a tool that would update these levels on a daily basis for the most popular ETFs, ETNs and individual mining stocks.
Our preferred ways to invest in and to trade gold along with the reasoning can be found in the how to buy gold section. Additionally, our preferred ETFs and ETNs can be found in our Gold & Silver ETF Ranking.
As always, we'll keep you - our subscribers - updated should our views on the market change. We will continue to send out Gold & Silver Trading Alerts on each trading day and we will send additional Alerts whenever appropriate.
The trading position presented above is the netted version of positions based on subjective signals (opinion) from your Editor, and the Tools and Indicators.
As a reminder, Gold & Silver Trading Alerts are posted before or on each trading day (we usually post them before the opening bell, but we don't promise doing that each day). If there's anything urgent, we will send you an additional small alert before posting the main one.
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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief
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