Briefly: In our opinion, a speculative short position (half) in gold, silver and mining stocks is justified from the risk/reward point of view.
In the past few days we reported that mining stocks showed strength despite the lack of really positive signals for gold and silver. In yesterday’s alert, we wrote that the USD Index could be at least partially responsible, due to the recent strongly negative correlation. Yesterday, the USD declined visibly and yet both precious metals and mining stocks declined. What are the implications?
The implications are that this small rally in mining stocks might be over or is close to being over. Before we move to the miners, let's take a look at gold and silver (charts courtesy of http://stockcharts.com).
Gold moved lower yesterday and the decline in it simply seems to continue. The move lower "should have" generated a bigger rally but it didn't, which is a bearish sign. Consequently, our previous comments on gold remain up-to-date:
We just saw another daily close below the rising support lines, so the breakdown is now confirmed. Consequently, even though gold moved higher, the overall implications of the above chart became more bearish.
Additionally, the size of the volume on which gold moved higher was lower than what we’d seen during Tuesday’s downswing, so the implications are – once again – bearish.
The volume on which gold declined on Thursday was once again higher than what we’d seen during Wednesday’s rally, so once again the price-volume implications are bearish.
Silver's bearish outlook also remains unchanged as the price didn’t do much yesterday.
Finally, a look at mining stocks reveals that yesterday's initial rally took the GDX ETF to its Nov. 2014 high, something that we had viewed as a possible outcome that would still not change the bearish outlook. From the short-term perspective it may seem that we have a breakout, but from the medium-term perspective, a bearish head-and-shoulders pattern is being formed. The outlook hasn't changed and our previous comment remain up-to-date:
The red resistance lines that you can see on the chart are based on the possible head-and-shoulders pattern. If we see a move to the Nov. high or even to the $21 level but without a visible breakout above them and then see a decline, the implications will be very bearish. If we don’t see such upswings and miners decline before these levels are reached (which seems likely), then the implications will be very bearish anyway, because the head-and-shoulders pattern will continue to be formed. If it is completed, the decline following the breakdown below $17 could take the GDX ETF below $13.
Let’s keep in mind that miners have been particularly influenced by the USD’s movement and the USD declined yesterday. Consequently, miners had a good reason to move higher.
Yesterday action, or rather lack of action in metals and miners given the USD’s decline suggests that the precious metals sector now “wants” to respond to bearish news, not the bullish signals. The lack of rally in mining stocks is particularly bearish as it was this part of the precious metals market that replied to the dollar’s weakness in the most significant way.
Will the USD Index decline shortly? Not necessarily. The breakdown below the rising support line is unconfirmed and we previously saw a fake move below it at the beginning of this month. A turnaround in the USD Index could easily translate into lower precious metals and mining stock prices and this still seems to be the most likely outcome for the following days / weeks.
Summing up, it seems that quite a lot happened in the last 2 days, not much changed as far as the outlook is concerned, which we view as bearish but not extremely bearish. The situation in gold and silver deteriorated (once again, based on the price-volume action) and we can definitely say the same about the gold to oil ratio, but the environment improved for mining stocks (not dramatically, though). We think that overall it’s still justified to keep a small (and only a small one until we see more bearish confirmations) short position intact.
We will keep you – our subscribers – updated.
To summarize:
Trading capital (our opinion): Short (half position) position in gold, silver and mining stocks is justified from the risk/reward perspective with the following stop-loss orders and initial (!) target prices:
- Gold: initial target price: $1,115; stop-loss: $1,253, initial target price for the DGLD ETN: $87.00; stop loss for the DGLD ETN $63.78
- Silver: initial target price: $15.10; stop-loss: $17.63, initial target price for the DSLV ETN: $67.81; stop loss for DSLV ETN $44.97
- Mining stocks (price levels for the GDX ETN): initial target price: $16.63; stop-loss: $21.83, initial target price for the DUST ETN: $23.59; stop loss for the DUST ETN $12.23
In case one wants to bet on lower junior mining stocks' prices, here are the stop-loss details and initial target prices:
- GDXJ: initial target price: $21.17; stop-loss: $27.31
- JDST: initial target price: $14.35; stop-loss: $6.18
Long-term capital (our opinion): No positions
Insurance capital (our opinion): Full position
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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