Briefly: In our opinion speculative short positions (full) in gold, silver and mining stocks are justified from the risk/reward perspective. We are keeping the stop-loss levels at their current levels, which means that we are effectively keeping some gains locked and at the same time we’re allowing the profits to increase.
Gold stocks erased the gains of the previous days during yesterday’s session alone and gold declined visibly as well. Is their and gold’s rally over?
It’s quite likely, but the more important thing is that even if they rally some more here, they are not likely to rally much more and lower prices are likely to be seen in the coming weeks anyway.
Let’s start today’s analysis with the gold market (charts courtesy of http://stockcharts.com).
Our previous comments on gold from the long-term perspective remain up-to-date:
Gold ended the week below the declining red dashed resistance line and the trend remains down – there were no changes based on Thursday’s and Friday’s small moves higher.
Keeping this in mind, let’s take a look at the short-term gold chart.
In yesterday’s alert we commented on the above chart in the following way:
Please note that we are not ruling out a more visible corrective upswing at this point. The retracement levels based on this month’s decline are marked in green. The first retracement is at about $1,235, so even if gold moves to this level, it will not change anything. In fact, even gold moving to $1,262 would still be viewed as an upward correction at this time (we don’t think that it will move as high, though).
Regardless of the possible upward correction (based on today’s pre-market action, it’s already taking place), it seems that keeping the short position intact is still justified from the risk/reward perspective. The reason is that we are after major sell signals and breakdowns and a possible move back above the previously broken levels would need to be confirmed before having bullish implications. The correction could end quickly and be followed by a big slide (say $1+ decline in silver) that one would not be able to take advantage of by being out of the market. The breakdowns and medium-term sell signals justify preparing for the above while enduring small upswings.
The above remains up-to-date. Please note that gold indeed moved higher, but didn’t invalidate anything – it remains below both resistance lines and the outlook remains bearish.
We saw a repeat of Thursday’s action on Friday as gold once again moved higher, didn’t rise above the upper of the rising resistance lines, and closed very close to the lower one. The volume was also similar – and rather low – on both days. The implications are also similar – and bearish. The current small move higher seems to be nothing more than a correction after a quite visible decline that we saw in February.
Gold declined once again after reaching the upper of the resistance lines. The volume was higher than during the previous days’ upswings, so the price-volume implications are bearish.
If we consider the gold to USD Index ratio, we have just seen a breakdown below the 2014 lows and the ratio seems to be on its way to its target level. The implications are bearish.
Meanwhile, all that we wrote regarding the above silver chart previously remains up-to-date:
Meanwhile, the situation in the silver market didn’t change at all yesterday. Silver is after an important breakdown and it’s likely to decline in the following days or weeks. Please note that the fact that silver didn’t decline yet is not a sign of strength. It’s the natural way of silver to react – it very often either moves very sharply or stays in the same place for an extended time. Based on the recent breakdown, it seems that the next move will be to the downside.
Silver remains below the rising short-term resistance line and the declining long-term resistance line. Consequently, the outlook remains bearish.
Meanwhile, we wrote the following about the HUI Index:
(…) it seems that this decline is not over and that miners have further to fall. Gold is moving higher in today’s pre-market trading, so the odds are that HUI will move back above its 2013 low. This will not have profoundly bullish implications, though. The key declining resistance line is currently at about 200, so the odds are that even if gold stocks move higher, they will not move above this level.
The above remains up-to-date. We saw some strength and we could even see some more, but it would not invalidate the bearish outlook unless we see a confirmed breakout above the declining resistance line (which seems unlikely).
There’s one more chart that we would like to share with you today. It features the gold stocks’ performance relative to other stocks.
The above little-followed ratio has bearish implications for the precious metals market. As long as gold stocks are likely to underperform other stocks, gold will be likely to decline. The former is the case right now as the gold stocks to the general stock market ratio remains in a major downtrend.
Overall, we can summarize the situation in the precious metals market in the same way as we did previously:
Summing up, while we are already seeing some kind of corrective upswing, it doesn’t seem to be justified from the risk/reward perspective to adjust the current profitable positions. The profits may get smaller temporarily, but the odds are that they will become even greater as the medium-term trends remain down and the medium-term sell signals remain in place.
As always, we’ll keep you – our subscribers – informed.
To summarize:
Trading capital (our opinion): Short positions (full) in gold, silver and mining stocks with the following stop-loss orders and initial (!) target prices:
- Gold: initial target level: $1,180; stop-loss: $1,254, initial target level for the DGLD ETN: $75.23; stop loss for the DGLD ETN $63.16
- Silver: initial target level: $15.70; stop-loss: $17.63, initial target level for the DSLV ETN: $66.25; stop loss for DSLV ETN $45.40
- Mining stocks (price levels for the GDX ETN): initial target level: $18.40; stop-loss: $22.17, initial target level for the DUST ETN: $18.99; stop loss for the DUST ETN $11.32
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 level: $23.37; stop-loss: $28.37
- JDST: initial target level: $12.30; stop-loss: $7.00
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 automated tools (SP Indicators and the upcoming self-similarity-based tool).
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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Hand-picked precious-metals-related links:
Gold Council Said to Seek Views on Exchange Trading in London
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Is this a new snag for gold demand?
Top 20 largest gold reserves by country (through 2014)
Silver Wheaton doubles gold stream at Vale mine
'Worst bear market in decades': Kaiser at PDAC
Ecological gold from Mongolia: Artisanal miners obtain Fairmined Certification
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Plot thickens over third bailout for Greece
Why we're cautious about 2015: Germany's Merck
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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief
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