In short: In our opinion short positions (half): gold, silver, and mining stocks are justified from the risk/reward perspective.

Gold moved up yesterday but silver and mining stocks actually declined at the same time. In other words, their underperformance has become more visible. Let’s take a closer look (charts courtesy of http://stockcharts.com.)

Miners moved lower by more than 1% and the volume – while still not huge – was higher than on the previous day when miners moved higher. This is a bearish sign on its own. It’s even more bearish when we compare it to what took place in the gold market.

Gold (GLD ETF) moved indeed higher, but the rally was both small and accompanied by relatively low volume. This is what we are expecting to see at local tops. The RSI indicator is overbought which confirms that a downturn is to be expected.

When we take a look at gold from the European perspective, we see that it moved to the 200-day moving average and that the RSI indicator is above the 70 level, which is a quite rare event. The last time the RSI was as overbought was at the August 2013 top and, prior to that, back in 2012. The implications are bearish.

Meanwhile, the palladium market continues to suggest that another decline is on the horizon. The white metal (and this time we don’t mean silver) went down after moving to the declining resistance line. Each time this was the case in the past months, a local top formed in the entire precious metals sector. That seems to be the case once again.

The situation on the currency markets remains unchanged. The Euro Index is likely to decline based i.a. on the long-term declining resistance line that was recently reached, but not broken.

With the currency market being a major (!) threat to the precious metals market’s rally and indications that this market will move lower at least in the short run, we think the short positions are justified.

To summarize:

Trading capital (our opinion): Short position (half): gold, silver, and mining stocks (we moved stop-loss orders slightly higher for gold, silver and the GDX ETF as the situation became more bearish because of the miners’ short-term underperformance).

Stop-loss details:

• Gold: $1,366
• Silver: $22.60
• GDX ETF: $28.9

Long-term capital: No positions

Insurance capital: Full position

Please note that we have started to include the insurance capital on the above list in order to avoid the impression that we suggest being entirely out of the precious metals market. Those of you who have been with us for a long time are well aware of this, but since a lot of new subscribers have joined us recently, we though a quick reminder should be useful.

We have suggested being out with one’s long-term investment capital, but being in as far as the insurance capital (physical precious metals holdings) is concerned. You will find details on our thoughts on gold portfolio structuring in the Key Insights section, but in short, it depends on your approach and experience. Below you will find a “portfolio” that we created for Eric – the fictional character that we use to illustrate suggestions (not investment recommendations) for beginning investors. More precisely, this was the portfolio before we suggested moving out of the precious metals market (so, before April 2013).

Now the “investment” category would be 0%, but the insurance remains at 44.1%. Please note that the average size for the trading position (we provide the netted amount in the above points regarding positions / trades) is just 1.4% of the entire capital in this case, so half of the position means using just 0.7% (11.8% is kept in cash / dedicated to trading but only a part of it is used for each trade). The entire portfolio report provides also 2 other fictional characters and their “portfolios”. John being the proxy for an experienced investor is the other extreme (Eric being the beginner). He “has” 17.6% in insurance capital and the average size of his trading position is 31.6% (half of which is 15.8%).

The bottom line is that if you assume that precious metals have much further to go (beyond 2011 highs) like we do, having just some money in the sector might appear as being out – and opening a small speculative short position in addition to it might seem as betting against it. When one looks at it from a “fresh perspective” without any assumptions about the gold bull and reads about shorting, they might get the impression that we suggest being entirely out of the market, which is not the case. Actually, the netted effect of small speculative short positions is simply hedging the insurance capital to a smaller or greater extent. It might be more than that if we suggest doubling the size of the short position, but that’s not the case just yet.

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.

Thank you.

Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief.
Gold & Silver Trading Alerts