Briefly: In our opinion, short (half) speculative positions in gold, silver and mining stocks are justified from the risk/reward point of view.
The situation in Greece and in the Eurozone in general is critical and while one would expect gold to soar given these circumstances – it didn’t. It moved only a few dollars higher (despite the USD’s much more visible decline), silver remained unchanged and mining stocks declined along with other stocks. Is the situation really that bad?
In short, yes, but not extremely bad as far as the short term is concerned. We would like to see a confirmed breakdown in the HUI Index below its 2008 low before suggesting doubling the size of the short position in order to increase the current profits even faster. Let’s take a look what changed based on yesterday’s price action, starting with gold (charts courtesy of http://stockcharts.com).
Please note that from the long-term perspective there were no changes in gold and silver (points that we made yesterday remain up-to-date), so in today’s alert we’ll focus on the short-term charts.
Gold moved higher yesterday and… That’s about it when it comes to listing yesterday’s bullish signs. The size of the move compared with its likely cause (closed banks in Greece and the introduction of capital controls), however, is actually bearish. Gold didn’t react in a meaningful way to a very bullish factor, and this is a strong sign that the gold market lacks buying power and that it will move lower sooner rather than later.
Silver did the opposite of what had happened on Friday – it moved higher initially and then declined ending only one cent higher. The initial rally was an attempt to move above the declining resistance line – something that we had seen previously and that marked a local top. Did silver form a local top once again? Quite likely.
Gold stocks held up relatively well last week by not moving below their 2008 low. Not only was it natural, but it also seems that the miners’ “strength” was just temporary. Gold stocks declined despite rising gold once again yesterday and the implications are bearish. The support created by the 2008 low was not broken so the situation did not become extremely bearish for the short term, but still, it deteriorated.
Once this support is broken, the following decline could be sharp, so it seems justified to have at least a small speculative short position in this market at this time.
Before summarizing, we would like to remind you of a major medium-term sell signal that remains in place.
The juniors to the general stock market ratio generated a major sell signal several weeks ago and this signal remains in place. Precisely, it was the Stochastic indicator that flashed the sell signal and the ROC indicator confirmed it. Since this signal was 100% effective in the past few years (as visible on the above chart), it’s no wonder that we’re seeing a decline also this time. The size of the previous post-signal declines suggest that this decline is not ending – it’s starting.
Summing up, the situation in the precious metals market remains bearish and based on yesterday’s disappointing performance of precious metals and very weak performance of mining stocks, it further deteriorated. It’s not extremely bearish just yet as we haven’t seen a confirmed breakdown in the HUI Index below its 2008 low, so we don’t think that doubling the size of our profitable short position is justified just yet. We’re getting close to this moment, though. We will keep you – our subscribers – updated.
We will keep you – our subscribers – updated.
To summarize:
Trading capital (our opinion): Short position (half) position in gold, silver and mining stocks is justified from the risk/reward perspective with the following stop-loss orders and initial (!) target prices:
- Gold: initial target price: $1,115; stop-loss: $1,253, initial target price for the DGLD ETN: $87.00; stop loss for the DGLD ETN $63.78
- Silver: initial target price: $15.10; stop-loss: $17.33, initial target price for the DSLV ETN: $67.81; stop loss for DSLV ETN $41.17
- Mining stocks (price levels for the GDX ETN): initial target price: $16.63; stop-loss: $21.83, initial target price for the DUST ETN: $23.59; stop loss for the DUST ETN $10.37
In case one wants to bet on lower junior mining stocks' prices (we do not suggest doing so – we think senior mining stocks are more predictable in case of short-term trades – we 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: $21.17; stop-loss: $28.68
- JDST: initial target price: $14.35; stop-loss: $5.65
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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