Briefly: Short positions (full position) in gold, silver, and mining stocks are justified from the risk/reward perspective.

Gold mining stocks moved yesterday, erasing part of Tuesday’s gains, however, they still ended the session below their 2015 high. Can we view yesterday’s action as a bullish sign?

In short, not really. Since there was no new breakout above the 2015 high, there was no improvement and the outlook remains bearish. The sell signal from the weekly Stochastic indicator was not invalidated either, so – again – not much changed, if anything. Let’s take a closer look at the charts (charts courtesy of http://stockcharts.com).

The USD Index broke decisively above the April highs and the 38.2% Fibonacci retracement based on the entire December – May decline and this breakout was not invalidated yesterday. The daily decline was too small to do so and thus the outlook didn’t change. Pullbacks after breakouts are quite natural.

Gold reversed yesterday, but the volume was not huge, so we don’t view it as a bullish sign. Conversely, compared with what happened in the USD Index (which declined), we can view yesterday’s action in gold as bearish. Why? Because after all, gold declined even though it was “supposed to” rally given the USD’s daily slide.

Silver moved a bit higher and so did mining stocks. The important thing is that silver’s move didn’t take it back above the October 2015 high, and the HUI didn’t rally above the 2015 high. The general stock market rallied yesterday, so it’s not wonder that assets that are more related to the general stock market (and the economy) like silver (many industrial uses), mining stocks (after all, they are stocks) and crude oil (many industrial uses) were positively affected. Still, even with this positive impact of the rally in stocks neither silver nor mining stocks broke above the important resistance levels. Consequently, we don’t view yesterday’s moves higher as bullish.

Summing up, the short-term outlook changed substantially on Tuesday (the medium-term outlook didn’t as it had been bearish previously) based on the invalidation of the breakout above the 2015 highs in gold stocks and due to gold’s move back into the declining trend channel. The outlook didn’t change due to Wednesday’s price action. The USD, gold, silver and mining stocks didn’t break through important technical levels and gold underperformed by declining despite a move lower in the USD Index. It appears that yesterday’s moves were just a pause and lower prices are still likely to be seen. Consequently, we view short positions as justified from the risk to reward point of view.

As always, we will keep you – our subscribers – updated.

To summarize:

Trading capital (our opinion): Short positions (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:

• Gold: initial target price: $1,006; stop-loss: $1,317, initial target price for the DGLD ETN: $86.30; stop-loss for the DGLD ETN $43.71
• Silver: initial target price: $12.13; stop-loss: $18.17, initial target price for the DSLV ETN: $65.88; stop-loss for the DSLV ETN $24.16
• Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $26.47, initial target price for the DUST ETF: $47.90; stop-loss for the DUST ETF $8.11

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: $40.13
• JDST ETF: initial target price: $61.74; stop-loss: $9.38

Long-term capital (our opinion): No positions

Insurance capital (our opinion): Full position

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 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, Gold & Silver Fund Manager

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