Briefly: In our opinion no speculative positions in gold, silver and mining stocks are now justified from the risk/reward perspective. However, day-traders might consider a small speculative long position in gold, silver and mining stocks.
The USD Index has finally... - as odd as it may sound – declined. The reversal was not unexpected and so were the implications – we saw an analogous reversal in gold, silver and mining stocks. The price action in silver was most profound and meaningful. The implications are important – but what are they? Let’s find out (charts courtesy of http://stockcharts.com.)
The reversal in the USD Index was the most profound one that we’ve seen in several weeks. The odds for a decline in the following weeks and days have increased once again. Our previous comments remain up-to-date:
The USD Index is still likely to turn south based on the resistance line that was reached, the turning point that is still very close and the extremely overbought situation in the short term.
The reversal in the USD Index triggered a reversal in gold. The volume on which the reversal took place was not extremely high, but it was not low either. Consequently, it’s quite likely the case that we will see further move higher – especially given the situation in the USD Index.
The silver market moved below the key support level, but only slightly and only temporarily. Silver closed above $19, so we don’t think that there are significant bearish implications at this point. As a reminder, here’s what we wrote about it yesterday:
The silver market is also at a very important support level – which seems to be the reason for which it refuses to move lower.
Please note that the $19 level held as support many times in the past year. There were unsuccessful attempts to move below it on Dec 3, 2013, Dec 4, 2013, Dec 31, 2013, Jan 30, 2014, Apr 24, 2013, May 1, 2014, May 2, 2014, May 29, 2014 and the only time that we silver closing below $19 was from May 30 2014 to Jun 4, 2014 – after that a sharp rally started. In other words the $19 level remained unbroken for a long time and the only breakdown was quickly invalidated.
Once it breaks below the previous lows, the decline is likely to accelerate very sharply. Until then, this support is likely to generate bounces and it seems that this will be the case also this time.
Unless silver moves much lower, or stays below the $19 level for the entire week, we don’t think the bearish implications will be really meaningful.
Please note that silver is still close to its turning point, which increases the odds for a corrective upswing. Our yesterday’s comments remain up-to-date:
Will the white metal decline once again here without a temporary rebound? That seems unlikely – the situation is extremely oversold (note the vey low RSI level), the cyclical turning point is here, and silver just reversed on a greater-and-average volume (not huge one, though).
Just like it was the case in gold, silver reversed on volume that was not huge, but was not low either. It was big enough for the turnaround to be meaningful and it seems that we could see a corrective rally shortly.
The breakdown in mining stocks is already confirmed, so the next big (really big) move is likely to be to the downside, but we have just seen an intra-day reversal, which is an indication that the next (at least) small move will be to the upside.
Our yesterday’s comments remain up-to-date:
The miners are likely to slide further in the coming weeks but – again – it seems that they won’t do so without another – generated by a decline in the USD - move up.
Please note that miners moved to the support created by the 61.8% Fibonacci retracement level and the RSI indicator is now very close to the 30 level – something that accompanied local bottoms in the past.
Summing up, the situation in the precious metals market is very tense. The medium-term trend remains down and we saw breakdowns in gold, silver and mining stocks, but at the same time the situation in the USD Index (which has been a major factor in determining the PMs’ and miners’ price swings) suggests that we could see a corrective upswing.
The most important thing is that the situation doesn’t really impact the medium-term outlook (after all, long-term investments are usually the biggest part of one’s portfolio), which remains bearish. In other words, we are already taking advantage of declining prices by staying on the sidelines – with the aim to buy back heavily at lower prices.
From the speculative point of view it still doesn’t seem to be a good idea to open speculative positions yet. Actually, we thought about opening long positions here and even wrote about it. However, when we were calculating the target prices and stop-loss details it turned out that the potential move up is too small to justify the risk of betting against the medium-term trend. The prices at which we had in mind for closing potential longs were $1,276, $19.50, and $25.30 for gold, silver and GDX ETF, respectively. After that, the long position would be too risky too hold given the existence of the medium-term trend. Since that is a relatively small rally to bet on, we decided not to open a position here and wait for the correction to make the picture clearer for opening the short positions.
At this point the odds for a corrective upswing have further increased, but the above comments remain up-to-date (the size of the rally that could be “safely” traded is relatively small), so it still doesn’t seem justified from the risk/reward perspective to open a speculative long position.
To summarize:
Trading capital (our opinion): No positions
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.
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 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
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