Gold & Silver Trading Alert: Gold Refuses to Rally Despite Dollar’s Slide

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Briefly: In our opinion, a speculative short position (full) in gold, silver and mining stocks is justified from the risk/reward point of view.

On Tuesday gold refused to rally despite the dollar’s slide. Yesterday, gold, silver and mining stocks actually managed to decline along with the USD Index, so the strength of the signal that we described yesterday is even stronger.

The USD Index declined once again and here’s what precious metals sectors did (charts courtesy of http://stockcharts.com).

Short-term Gold price chart - Gold spot price

Gold declined on relatively high volume moving temporarily below the support line based on intra-day lows. If this line was based on daily closing prices, we would not view yesterday’s price action as a breakdown, but since we’re discussing one based on intra-day lows and gold moved below it on such a basis, it seems that we can view yesterday’s action as a breakdown. It’s not confirmed, but the situation once again deteriorated.

Short-term Silver price chart - SLV ETF - iShares Silver Trust

Silver moved higher as well. The white metal recently rallied very temporarily and we emphasized that such a move was likely very temporary – indeed, silver declined and this move continued yesterday. The implications are bearish and the outlook remains bearish for the short and medium term.

GDX - Market Vectors Gold Miners - Gold mining stocks

As far as mining stocks are concerned, we see a move lower on relatively high volume. At the same time, it seems that the breakdown below the 50-day moving average was just confirmed. The decline seems to be ready to continue.

Most importantly, we have just seen another bearish sign from the entire precious metals sector as it declined in spite of a decline in the USD Index. Our yesterday’s comments remain up-to-date:

The important thing is what happened in the USD Index and the most important thing - from the point of view of a precious metals investor - is the way precious metals reacted to it. Namely, the USD Index declined significantly (it seems that the decline is temporary, though) - by more than 1.5 index points and yet the precious metals sector didn’t rally in a meaningful way. In fact, in terms of most currencies, gold and silver declined yesterday (for instance in terms of the euro).

When a given market doesn’t respond to positive signals (and a move lower in USD is definitely a positive signal) it’s quite likely to respond very visibly to the negative ones (for instance a come-back rally in the USD). The implications of yesterday’s action are bearish for the entire precious metals sector.

Based on yesterday’s price action, the implications are even more bearish.

Overall, we can summarize the situation in the precious metals market in the same way as we did yesterday:

Summing up, the outlook for the precious metals market was bearish yesterday and after yesterday’s session it became even more bearish. It seems that the final bottom is still ahead of us.

Several weeks have passed since we opened our speculative short positions in the precious metals sector and while the positions are not yet significantly profitable (miners and silver are trading at about the same price levels, while gold is lower), the reasons for which we opened them remain up-to-date, and so does the enormous profit potential.

We realize that gold’s lack of exciting movement (it’s been moving back and forth around the $1,200 level for weeks) is discouraging and boring, but it seems very likely that patience will be well rewarded. It’s before the move that one should be paying extra attention to the signals, not after it. The former is definitely the case at this time.

We will keep you – our subscribers – updated.

To summarize:

Trading capital (our opinion): Short (full 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: $18.13, initial target price for the DSLV ETN: $67.81; stop loss for DSLV ETN $38.44
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 $10.37

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: $28.68
JDST: initial target price: $14.35; stop-loss: $5.65

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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