Gold & Silver Trading Alert: Gold’s Breakout above Post-Brexit High

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Briefly: In our opinion short (full) speculative positions in gold and mining stocks are currently justified from the risk/reward point of view.

Gold and silver continue to move higher today and gold moved above last Friday’s post-Brexit vote high. Can the precious metals market still double its rally?

Of course, and the precious metals market will likely do much more than that and rally above the 2011 highs, but it is unlikely to do it before declining first. The current rally in the precious metals market is sizable, but no market can rally without corrections and it seems that we are likely to experience more than that. The analogy to the price pattern seen in 1982 that we described yesterday remains in place – we wrote that a move a bit higher will not to invalidate the pattern – gold would need to move at least to the first local high of the decline - $1,434 for the pattern to be less self-similar.

Let’s take a closer look at gold’s chart (charts courtesy of http://stockcharts.com).

Short-term Gold price chart - Gold spot price

Gold rallied on increased volume and the RSI indicator moved to the 70 level. The former is a bullish sign and the latter is a bearish sign. More importantly, gold broke above post-Brexit high in today’s pre-market trading and gold was just about $20 below its March 2014 high. That appears bullish, but keeping in mind the analogy to 1982, when gold topped below (!) the important top from the past, suggests that the situation has not necessarily improved.

GOLD:WTIC - Gold to Crude Oil ratio

The gold to crude oil ratio moved broke below the rising trend channel earlier this year and this is a bearish sing for gold, but please note that breakdowns are often followed by rallies to the broken level that are supposed to validate the breakdown. If the price or ratio doesn’t move back above the broken level, but instead starts to decline again, the breakdown is viewed as verified and lower prices become even more probable.

It appears that the above is the case with the gold to oil ratio – it’s verifying the previous breakdown below both the rising trend channel and the 50-week moving average. The breakdown was not invalidated, so the bearish implications remain in place.

We discussed the situation in silver thoroughly yesterday, so we will move on right to mining stocks. We would like to add, however, that due to silver’s volatile nature the position in silver might have been closed in today’s overnight trading, and even if it wasn’t, silver managed not to slide despite a big reversal shooting start candlestick, which could mean another test of $21 or so before the decline resumes. Consequently, we are not re-opening the position in silver right away and we don’t think one is currently justified from the risk to reward point of view, but we expect that this will be the case relatively soon.

HUI Index chart - Gold Bugs, Mining stocks

In yesterday’s alert, we wrote the following:

What about gold stocks? Since silver soared and gold moved higher, miners almost “had to” move higher as well. However, their rally was stopped by another high – the 2014 high. Consequently, it doesn’t seem that mining stocks are really breaking out just yet even though they moved above the previous 2016 high. In other words, the mining stocks’ action doesn’t invalidate the points made earlier today.

Gold stocks closed very close to their 2014 high – there was only a small breakout above this level, so it is not verified yet. The next resistance level would be at about 280 (late 2013 high), so even if the breakout is verified, gold stocks are not likely to rally far from here.

BPGDM - Gold Miners Bullish Percent Index

The Gold Miners Bullish Percent Index just hit 100, which is an extreme reading and the ultimate high. It shows extreme optimism (just like silver’s outperformance does) and that’s what we see at local tops, not at buying opportunities.

When this index was 0, mining stocks were very close to a local bottom, and the opposite is most likely the case right now.

Summing up, the long-term potential for the precious metals market remains great, but it also appears that this rally is already at or moving close to its end. The extreme reading in the Gold Miners Bullish Percent Index and silver’s price performance show the extreme optimism among the precious metals investors and these are the times when one should be fearful, not extremely optimistic. No market can move in a straight line and gold is no exception. The similarity between the current situation and the very similar price pattern from 1982 points to lower precious metals prices in the coming months as well.

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

To summarize:

Trading capital (our opinion): Short positions (full position) in gold and mining stocks are justified from the risk/reward perspective with the following entry prices, stop-loss orders and initial target price levels:

Gold: initial target price: $1,006; stop-loss: $1,423, initial target price for the DGLD ETN: $86.30; stop-loss for the DGLD ETN $44.35
Silver: No position at this time
Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $30.77, initial target price for the DUST ETF: $47.90; stop-loss for the DUST ETF $3.62

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: $50.70
JDST ETF: initial target price: $61.74; stop-loss: $1.97

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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