Briefly: In our opinion, full (150% of the regular full position) speculative short positions in gold, silver and mining stocks are justified from the risk/reward perspective. This position was originally featured on Jan. 12, 2017 at 3:49PM.
3 specific things happened in the precious metals market on Friday: gold reversed, miners moved higher and silver soared. What are the implications?
In short, the mentioned events didn’t change the outlook, mainly due to the volume levels.
Let’s take a look at the details (charts courtesy of http://stockcharts.com).
Gold indeed reversed, but as mentioned above, the volume levels were not significant, so the implications are not meaningful.
There was no reversal seen in the case of weekly candlesticks (gold declined earlier in the week), so it doesn’t seem that Friday’s action changes anything.
We can say the same thing about the miners’ small upswing – the volume that accompanied it was relatively low, which makes the rally more bearish than bullish. Besides, the sell signal from the Stochastic indicator wasn’t invalidated at all based on Friday’s move higher.
Now, the thing that rallied particularly well and on relatively strong volume, was silver. Silver’s very short-term outperformance relative to gold usually leads sharp declines, so it is not a bullish sign – it’s much more of a bearish confirmation.
Before summarizing, we would like to discuss the issue of the recent spike (“spike”) in gold lease rates.
We were asked the following question:
(…) there are 4 spikes of rates : oct 2008, end December 2014, end December 2016 and end December 2017. On each spike it followed an uptrend gold price. If history repeats and take 2014 as most similar comparison gold price may get 1270 aprox by end February. I have little experience in gold trading. Does it make sense to you?
The big spikes in lease rates could indicate important bottoms, but we don’t think we have seen one recently. The big spikes were seen in late 2008, late 2013 and in late 2015. The first and the last were very important bottoms and the late-2013 one was still somewhat important. The spike that we saw in the lease rates recently was much smaller than the above examples – it was more in tune with what we saw in more or less middle of 2016 or October 2015 – and both of these spikes preceded declines. However, we don’t want to say that the recent spike in lease rates is bearish – we want to say that its rather not meaningful as it is too unclear what the implications are (both rallies and declines followed similar action in the past). Besides, please note that in the first half of 2008 there were a few bigger spikes and none of them started a major rally.
Summing up, the short-term outlook and medium-term outlook remain bearish.
As always, we will keep you – our subscribers – informed.
To summarize:
Trading capital (supplementary part of the portfolio; our opinion): Short positions (150% of the full position) in gold, silver and mining stocks are justified from the risk/reward perspective with the following stop-loss orders and initial target price levels / profit-take orders:
- Gold: exit-profit-take level: $1,063; stop-loss: $1,243; initial target price for the DGLD ETN: $81.88; stop-loss for the DGLD ETN $48.78
- Silver: initial target price: $13.12; stop-loss: $17.53; initial target price for the DSLV ETN: $46.18; stop-loss for the DSLV ETN $22.86
- Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $24.63; initial target price for the DUST ETF: $143.56; stop-loss for the DUST ETF $27.97
In case one wants to bet on junior mining stocks' prices (we do not suggest doing so – we think senior mining stocks are more predictable in the case of short-term trades – if one wants to do it anyway, we provide the details), here are the stop-loss details and initial target prices:
- GDXJ ETF: initial target price: $14.13; stop-loss: $40.12
- JDST ETF: initial target price: $104.26; stop-loss: $17.28
Long-term capital (core part of the portfolio; our opinion): No positions (in other words: cash)
Insurance capital (core part of the portfolio; our opinion): Full position
Please note that the in the trading section we describe the situation for the day that the alert is posted. In other words, it we are writing about a speculative position, it means that it is up-to-date on the day it was posted. We are also featuring the initial target prices, so that you can decide whether keeping a position on a given day is something that is in tune with your approach (some moves are too small for medium-term traders and some might appear too big for day-traders).
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 signs 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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