Gold & Silver Trading Alert: Gold, Silver and Miners Soar Again

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Briefly: In our opinion, long (full) speculative positions in gold, silver and mining stocks are justified from the risk/reward point of view.

The precious metals sector rallied once again yesterday, but all of its parts are moving close to their respective resistance levels. Is this a temporary rally and is it already over, or will the upswing continue for much longer?

We’d say that the most likely outcome is somewhere in between but it’s closer to the former than the latter scenario. In other words, it seems that the corrective upswing is not completed but close to being complete. Let’s take a look at the charts (charts courtesy of http://stockcharts.com).

Short-term Gold price chart - Gold spot price

Let’s start by saying that most of our yesterday’s comments on gold remain up-to-date:

Gold rallied quite visibly yesterday and it finally closed below the July 20 close – something that they yellow metal didn’t manage to do since that day. (…)

Another thing that has bullish implications (but not extremely bullish) is the RSI indicator. As you can see in the upper part of the above chart, when the RSI (and gold) moved higher from oversold levels, the rally very often took place until RSI moved to the 50 - 60 range (marked with dashed lines on the above chart). This tells us that gold is likely to move somewhat higher but not significantly (at least that’s not what we can infer from the previous oversold situations).

Considering how low the RSI was, where it is today, and how high it could go, and translating it to where gold was and currently is gives us a very rough estimation of $1,125 – 1,145 as a target price. Naturally, the RSI alone is not enough to provide a reliable target price or area.

However, if we apply other analogies, we also end up with more or less the same target area.

The 50-day moving average is currently at $1,147.15, but given the pace at which it has been declining, it seems likely that it could meet gold right in the mentioned target area.

Moreover, this area includes the Nov. 2014 low, which was a major support and now serves as a major resistance.

Finally, if we consider the sizes of corrective upswings after situations when the RSI was similarly oversold as it has been recently, we see that gold usually corrected between 38.2% and 61.8% of the preceding decline (or close to these levels). The mentioned area is mostly within the 38.2% - 61.8% range, which serves as another confirmation that this target area is likely to include the next local top.

The RSI indicator moved above the 50 level, but gold didn’t move to our target area. The implication is simply that gold might have not rallied enough.

In fact, gold rallied on huge volume and broke above the short-term declining resistance line, which is a bullish factor for the short term. Consequently, the precious metals market is not necessarily likely to decline right away – in fact, it’s more likely to move even higher temporarily before diving again.

Will the top be within our target area? Well, the only true answer is that “nobody knows”, but taking into account the past patterns allows us to say that it’s likely, but not imminent. We can’t rule out a move even higher (on a short-term basis), but if / once gold moves above our target area it will mean that the most likely / profitable part of the move higher is over. The following part is something that could take place, but it’s not certain enough to be worth betting on.

Long-term Silver price chart - Silver spot price

Silver moved higher, just like gold did and since it happened in tune with our expectations, our previous comments remain up-to-date:

There is significant long-term resistance relatively close to where silver currently is. The declining dashed resistance line and the 50-week moving average provide resistance close to the $16 level. It’s unclear whether silver’s next local top is more likely to take place a bit below or above this level, but it seems likely that we will get confirmation from another market (gold or mining stocks) once silver moves close to this area.

The action seen in mining stocks is once again bullish as well as miners simply moved higher.

HUI Index chart - Gold Bugs, Mining stocks

In the previous alerts we wrote the following:

Miners didn’t plunge and they indeed formed a bullish reversal candlestick. This has bullish implications for the next few weeks, and we can say the same about the buy signal from the weekly Stochastic indicator.

The bullish signal was indeed followed by more bullish action and this week’s invalidation of the breakdown below the 2003 low is yet another bullish factor. The situation improved and our target area (marked with green) remains up-to-date.

Yesterday’s rally serves as yet another confirmation of the mentioned bullish case for the short term.

GDX - Market Vectors Gold Miners - Gold mining stocks

We commented on the above chart in the following way yesterday:

The situation improved once again yesterday. In fact, the early corrective intra-day decline served as a very small consolidation and it made the subsequent gains more probable. The short-term outlook remains bullish and our target area remains up-to-date.

The target area is between the current price and the $17 level. Consequently, mining stocks are likely to move higher, but not much higher. Yesterday’s rally on strong volume clearly supports higher prices, so we wouldn’t be surprised by a move above the $16 level shortly, especially given the strong volume during yesterday’s rally.

So, is this a good time to enter binding profit-take orders for our long position in the precious metal sector? At the first time it seems so, but after a closer examination it turns out that it might not be the case. The outlook is very bullish for the short term, and we can’t rule out the possibility that gold, silver and miners will move to the upper part of our target areas before declining once again. Consequently, we will wait for more bearish signs before taking profits off the table and (possibly) re-entering short positions.

Before summarizing would like to emphasize the fact that the profits that we have on the current long position in mining stocks are significantly higher than the gains in the GDX due to individual stock selection and the outperformance of individual stocks. When we opened the current speculative long position (July 27, the alert was posted / sent before the markets opened), we wrote the following:

On a side note, if you’re not familiar with the way we choose individual gold stocks and silver stocks, we suggest that you become familiar with our tools: Golden StockPicker and Silver StockPicker – these are the tools that we will utilize to select miners to buy when getting back on the long side of the market, as they have greatly enhanced the performance of the simple buy-and-hold approach. They can be used for speculative trades as well and at this time they favor IAMGOLD Corporation and Randgold Resources as far as gold stocks are concerned and First Majestic Silver Corporation and Silver Wheaton Corporation as far as silver stocks are concerned.

Based on the opening prices at July 27 and yesterday’s closing prices we have the following:

GDX ETF (proxy for precious metals miners in general) gained 11.65%
HUI Index (proxy for gold stocks) gained 10.86%
SIL ETF (proxy for silver stocks) gained 13.19%
The average gain of the 4 stocks (IAG, GOLD, AG, SLW) selected by Golden and Silver StockPickers: 18.24%

In other words, our StockPickers made a good trade, a great one – the profit is more than one and a half as big as it would have been if one had used the GDX instead. That’s not a one-time event – we have conducted very thorough research on stock selection using our StockPickers vs. using the industry averages for both trading and investment and these tools can increase gains in both cases. To make a long story (the report) short, it seems best to use the StockPickers for long-term investments by taking the top 5 gold and silver stocks and rebalancing them (by checking the StockPickers‘ ranking) periodically. In the case of trading, it seems best to use the 2 top gold and silver stocks (example of which you have just seen).

If you’re wondering how it is that these tools were able to achieve so good results, you’ll find more details in our May 11 Alert – we discussed this in great detail before the alert’s summary. In short, the tools were created for this purpose – precisely they were created as a counter-reaction to all the sophisticated classic fundamental analyses that didn’t provide good results. And they deliver.

Before you ask – yes, there will be another tool released in the not-too-distant future that will deal with the junior mining stocks sector. Due to the specifics of the junior sector, we can’t utilize the same principles that we take advantage of in the StockPickers and we had to create another tool for it.

Overall, since the situation improved slightly, but the implications and outlook remain as they were yesterday, we can summarize today’s alert just as we summarized yesterday’s issue:

Summing up, from the medium-term perspective nothing changed in the precious metals market recently as the situation was and still is bearish (we don’t think the final bottom for this decline is in yet), but it seems very likely that we will see a corrective rally before the decline continues (and we continue to think that taking profits off the table and closing our previous short position when silver moved to $14.33 was a good idea).

There are more bullish factors than bearish ones (the bearishness in the mainstream media being the most significant bullish factor), and the situation has actually become much more bullish because of yesterday’s price-volume action. We believe that it’s currently justified from the risk/reward perspective to keep the full size of the profitable speculative long position in the precious metals sector. It seems quite likely that our profits on this trade will become even bigger.

We will keep you – our subscribers – updated.

To summarize:

Trading capital (our opinion): Long position (full) position in gold, silver and mining stocks is justified from the risk/reward perspective with the following stop-loss orders and initial (! – this means that reaching them doesn’t automatically close the position) target prices:

Gold: initial target price: $1,135; stop-loss: $1,063, initial target price for the UGLD ETN: $9.44; stop loss for the UGLD ETN $7.69
Silver: initial target price: $15.90; stop-loss: $14.12, initial target price for the USLV ETN: $16.54; stop loss for USLV ETN $11.51
Mining stocks (price levels for the GDX ETN): initial target price: $15.87; stop-loss: $12.37, initial target price for the NUGT ETN: $5.17; stop loss for the NUGT ETN $2.46

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: initial target price: $21.78; stop-loss: $17.67
JNUG: initial target price: $12.01; stop-loss: $6.39

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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