Briefly: In our opinion, long (half) speculative positions in gold, silver and mining stocks are justified from the risk/reward point of view.
Gold and silver didn’t do much yesterday (if anything), but we saw some action in mining stocks. Namely, miners declined once again. Are they breaking into new lows before metals and the entire sector slide again shortly?
This could be the case, but we don’t think it’s likely. The decline in mining stocks was not significant and the breakdown is not confirmed and even if it is confirmed, the next strong support is just around the corner. Let’s take a look at the HUI Index chart (charts courtesy of http://stockcharts.com).
The index declined a bit, but that’s something that we took into account as a good possibility. In Tuesday’s alert we wrote the following:
The HUI Index chart is the only chart where the situation deteriorated based on yesterday’s decline. In the case of this proxy for mining stocks, we saw a breakdown below the recent lows and consequently a move to the next support level is now quite likely. The next support is relatively close – it’s at 102.99, so it would take less than a repeat of yesterday’s decline’s for this level to be reached.
If this level can be reached, why not short the market? Because the GDX ETF – a different proxy for the mining stocks has not broken lower, so it’s not very likely that the HUI is going to move lower. Plus, the situation in gold and silver doesn’t necessarily support lower prices in the short term. Most importantly, the bearishness levels in mass media are so high that it seems that long positions should be considered, not short ones (at least at this time; we expect to be back on the short side of the market within the next few weeks).
The above remains mostly up-to-date (GDX is below its previous lows but only slightly) and since yesterday’s low was 104.66, the HUI Index remains above the mentioned 102.99 support. We could see some further weakness, but we don’t expect it to be significant.
That’s basically the only chart that features any changes (the situation in gold, silver and key ratios remains unchanged, so if you haven’t had the chance to read Tuesday’s alert, we suggest that you do so today), so there’s not much more that we can tell you today. We’ll keep on monitoring the markets and report to you if anything changes, even if that happens in a few hours.
Consequently, we can summarize today’s alert in the same way as we summarized the 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, but – as we described yesterday - from the short-term perspective the situation is bullish but not extremely so (the situation in the HUI Index deteriorated, but it improved in the case of gold’s short-term chart, so overall not much changed based on yesterday’s price swings; plus PMs ability to hold steady despite a move higher in the USD Index is a bullish phenomenon). The precious metals market is still oversold on a short-term basis and the situation still seems bullish for the short term (and we think that taking profits off the table and closing our previous short position when silver moved to $14.33 was a good idea), but it’s not as bullish as it was just a few days ago and not as bullish as it was when we decided to open the speculative long positions.
While – based on the bearishness in the mainstream media – it doesn’t seem that closing the speculative long positions entirely is a good idea, it does seem that only half of the regular size of the position is currently justified from the risk/reward point of view.
We will keep you – our subscribers – updated.
To summarize:
Trading capital (our opinion): Long position (half) 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: $1,130; stop-loss: $1,063, initial target price for the UGLD ETN: $9.24; stop loss for the UGLD ETN $7.69
- Silver: initial target price: $15.20; stop-loss: $14.12, initial target price for the USLV ETN: $14.40; 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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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief
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