Briefly: In our opinion no speculative short positions are currently justified from the risk/reward point of view. We will likely re-enter the short positions shortly.
After the FOMC minutes were published gold and silver plunged while the USD rallied. However, the latter didn’t rally above its April highs and this resistance level could keep the rally in check. What will the metals do?
Let’s take a closer look (charts courtesy of http://stockcharts.com).
The USD Index rallied but only to the April highs – not above them. This means that the corrective pullback is still quite likely to be seen especially given the current seasonal tendencies for the USD Index. The index might correct the rally in mid-May.
How low is the USD Index likely to correct? Most likely to the 94 level – that’s where we currently have the 38.2% Fibonacci retracement (and this technique tends to work particularly well for currencies) and that’s more or less the level to which the USD declined after topping in April.
Moreover, since the USD Index had such a quick run-up this month, it’s simply natural to expect some kind of correction.
Again, we don’t think that the move lower would be anything more than just a pullback – we remain bullish on the USD Index also for the medium term.
Gold and silver both declined on significant volume yesterday after having moved higher on relatively low volume. Both markets confirm that the current big move is down. So, have we missed entering at the top? Most likely – based on the situation in the USD Index – no, but even if that is the case, the vast majority of the decline is still ahead. Moving back to the short-term outlook, metals didn’t show that they stopped responding to the USD’s signals yesterday – they declined as the USD rallied, nothing more.
There’s one thing that’s missing here – silver’s short-term outperformance. The white metal didn’t perform particularly well recently, and it usually shoots up right before the big plunge. This would serve as a great confirmation that the bottom in the USD and top in the metals is in – however, we have yet to see this confirmation.
In case you are wondering, the True Seasonal patterns for gold suggest that a short-term bottom was just formed and a second-half-of-May corrective upswing is coming. Will the gold market wait with the decline until early June? Possibly, but if we see strong bearish confirmations (like silver’s short-term outperformance) within a week or so, we will not wait until next month to re-enter the short positions.
Miners plunged on huge volume. This is a classic bearish sign, however, based on the previous several similar days after which miners didn't decline, we view it only as a moderately bearish sign, especially that miners didn’t move below their May lows (let alone both April highs).
If we get a confirmed breakdown below the above, we might re-open the short positions, but it’s more likely that we’ll see a pullback in the USD and a corrective upswing in metals and miners. Ideally, we would then like to see a move higher in metals and miners on low volume ending with daily outperformance of silver.
Summing up, metals moved lower while the USD moved higher, but there was no breakout in the case of the latter and there is still a significant chance of a pullback in the USD Index and a corrective upswing in metals and miners – also given the True Seasonal tendencies for May. We plan to re-enter short positions in the precious metals sector when the risk to reward ratio becomes more favorable.
At the moment of writing these words, we see another pre-market decline in gold and silver and a move higher (breakout above April highs) in the USD Index, however, this particular time (before 9 AM) is known for intra-day reversals. Consequently, we may send a follow-up to this message shortly in which we would re-open the short positions, but we are not doing so yet.
As always, we will keep you – our subscribers – updated.
To summarize:
Trading capital (our opinion): No positions
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, Gold & Silver Fund Manager
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