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.
Yesterday was just another period of back-and-forth movement for gold, silver, the USD Index and even the general stock market – but not for precious metals mining stocks. Gold stocks and silver stocks plunged very visibly - there are very important implications of this move and they are not bullish.
Let’s take a closer look at the charts, starting with the GDX ETF (proxy for both gold and silver stocks, charts courtesy of http://stockcharts.com).
Precious metals mining stocks declined on huge volume and the fact that this happened without the metals’ lead is profound. Miners were a leading indicator in the recent past as well as in the previous years – including the time before THE plunge of 2013. We discussed that in greater detail in yesterday’s alert, while describing the situation in gold stocks (using the HUI Index as a proxy):
The HUI Index declined by 8 index points (almost 4%) [last week] despite having very strong reasons to move higher. Not only gold rallied, but we also saw higher prices of stocks in general (highest weekly close ever in case of S&P and DJIA) – miners should have rallied strongly and they weren’t just responding weakly – they declined, which is rather extreme. We saw something similar in 2012 and 2013, before the huge plunge in gold.
The above chart features something less visible but still very important. The size of the decline that followed the 2011 top and the size of the subsequent rebound (in the second half of 2012) is practically identical to the decline that we saw in the second half of 2016 and the current rebound. Back in 2012 gold stocks formed a local top after retracing about 50% of the previous decline and it appears that exactly the same thing happened also this time.
But the question remains if the top in metals was just formed or not. The upswing in gold and volume in GLD makes it quite likely.
Interestingly, while the HUI declined by almost 4% last week, it’s already down by more than 5% this week, even though gold is flat. The bearish implications described above clearly remain in place.
We already featured the GDX ETF chart that includes silver stocks, but let’s take a look specifically at them, to make sure that they confirm the observations made while analyzing gold stocks.
During yesterday’s session alone silver stocks declined about as much as they did from the February top to Friday – the size of the decline just doubled. The volume was huge. Both factors (size and volume) serve as good confirmations of the bearish signals that we discussed earlier.
Before summarizing, we would like to reply to a question that we received recently – it was: "Why exactly did we move the stop-loss level higher in case of gold and our speculative position (there is no position in case of the long-term investment capital)?" The reply to the question is to a big extent a discussion about what a stop-loss really is - we encourage you to read our reply to this issue in the FAQ section.
In particular, the stop-loss was increased because the price at which the outlook would change regardless of other factors, such as the mining stocks’ performance, increased as well. This price increased, because we saw new bearish signals (the extreme underperformance of mining stocks being the most important from the short-term point of view) and the current outlook (including stop-loss levels) had to take it into account. Consequently, it is possible that the stop-loss level will be increased again, but it is also possible (which seems more likely) that it will be lowered, as the prices of metals and miners move lower (and we move the stop-loss lower to lock in some of the gains) - it all depends on how the situation develops and what signals we get.
Summing up, the bearish outlook for the precious metals sector remains in place. While the daily price changes are not particularly meaningful (except the miners’ underperformance – its implications are meaningful and bearish), the long- and medium-term signals that are very important (being highly effective in the past) continue to paint a very bearish picture for the precious metals sector for the upcoming weeks and months.
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: $1,273; initial target price for the DGLD ETN: $81.88; stop-loss for the DGLD ETN $48.17
- Silver: initial target price: $13.12; stop-loss: $18.67; initial target price for the DSLV ETN: $46.18; stop-loss for the DSLV ETN $19.87
- Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $26.34; initial target price for the DUST ETF: $143.56; stop-loss for the DUST ETF $21.37
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: $45.31
- JDST ETF: initial target price: $104.26; stop-loss: $10.78
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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