Briefly: In our opinion speculative short positions (half) are justified from the risk/reward perspective in gold, silver, and mining stocks.
The Euro Index moved to its very long-term declining resistance line once again. One might have expected the precious metals sector to rally given this move – but it hasn’t. It underperformed once again, which is a bearish sign.
The GLD ETF has declined and it has done so on strong volume. We haven’t seen a similar move in spot gold (taking different closing hours into account), but the lack of move higher is bearish anyway because gold was “supposed” to rally based on the euro’s move up.
Moreover, we saw a sell signal from the Stochastic indicator and this indicator has been quite reliable for gold in the past months.
Silver moved to its previous lows once again, and the SLV ETF declined on huge volume. This, by itself, might suggest that the bottom was formed as we’d previously seen bottoms when the SLV declined on huge volume, but given silver’s relative performance to the Euro Index, it might be the case that the decline on huge volume is really a beginning of an even bigger downswing.
Compared to GLD and SLV, the GDX ETF held up relatively strong, but the volume that we just saw was rather weak. In this case we think the proper way to interpret the size of the volume is to view the miners’ strength as unreliable.
Moving back to the currency sector, while the Euro Index moved to its resistance line, the USD Index moved to its support line. As we have recently emphasized, the cyclical turning point is just a few days away. This means that we are quite likely to see a reversal shortly, and since the support line was just reached, we might just have seen the bottom.
With bearish implications from the USD and Euro Indices themselves and bearish implications from the gold-USD and gold-euro links it seems that the outlook for the precious metals sector is bearish. Is it bearish enough to justify opening short positions? It seems so. The price-volume action in the GLD ETF suggests lower prices in the coming days, which could easily mean an invalidation of the breakout in mining stocks. The sell signal from the Stochastic indicator for gold further increases the odds of a decline in the precious metals sector.
We are placing the stop-loss orders relatively close to the current levels, so that if gold does indeed break out, we will be immediately taken out of the market. This seems to be the best way to approach the current situation, in our view. Also, because miners haven’t invalidated the breakout yet, we are using only half of the regular size of the position.
To summarize:
Trading capital (our opinion): Short positions (half) in: gold, silver, and mining stocks with the following stop-loss orders:
- Gold: $1,316
- Silver: $19.70
- GDX ETF: $24.80
Long-term capital: No positions
Insurance capital: Full position
Please note that a full speculative position doesn’t mean using all of the speculative capital for this trade. You will find details on our thoughts on gold portfolio structuring in the Key Insights section on our website.
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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