Gold & Silver Trading Alert: Gold’s Decline Continues

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Briefly: In our opinion, a speculative short position (full) in gold, silver and mining stocks is justified from the risk/reward point of view.

Gold rallied initially last week only to slide back down and end it $2.70 lower. It seems that the market heavily overestimated the Fed’s willingness to change their current approach and the consequences on gold. It soon became obvious that nothing changed and gold resumed its previous trend, as we expected. Will it slide even further or is it high time for a rebound?

Let’s take a look at the charts, starting with gold (charts courtesy of http://stockcharts.com).

Long-term Gold price chart - Gold spot price

Once again, the long-term chart doesn’t show any changes, but we think it’s worth keeping in mind as it emphasizes that the medium-term trend is down.

Gold flashed a sell signal in the Stochastic indicator which has bearish implications, but the way that the Stochastic indicator is currently shaped has even more bearish implications, because it was shaped in a very similar way right before the previous 2 major declines.

Short-term Gold price chart - Gold spot price

On the short-term chart we see the bearish developments as gold declined significantly on strong volume and in spite of the dollar’s move lower on Thursday and we see that it didn’t rebound before the end of the weak. Sure, it moved a bit higher in the final hours of Friday’s session, but that doesn’t change much. After all, no market can move up or down in a straight line, and the same goes for gold – small corrections will occur every now and then.

Moreover, please note that while the short-term (!) buy signals from the Stochastic indicator have not been reliable recently, the sell signals have been quite reliable – and we have just seen one.

Our previous comments remain up-to-date:

The combination of bearish factors is quite striking and the outlook is very bearish.

The small head-and-shoulders pattern is still being formed (the right shoulder of the big head-and-shoulders pattern is a head-and-shoulders pattern on its own as well) – if this continues, we will see gold moving much lower relatively soon.

The smaller head-and-shoulders pattern is about to be completed and once it does, we are likely to see much lower prices – and then even lower prices based on the bigger head-and-shoulders pattern.

Long-term Silver price chart - Silver spot price

This week we’ll focus on silver’s long-term picture. In short, silver’s recent move higher (and back down) was simply another attempt to move to or above the declining red resistance line. Another one that failed. The trend simply remains down and we are likely to see much lower silver prices in the coming months.

Based on the time factor, we moved our target area for silver a bit lower – it’s now around the $12 level. We will comment on the price targets for silver (in a similar way to our comments on gold price targets) in one of the following alerts.

The thing that might be concerning at this time is the strength that miners showed once again.

GDX - Market Vectors Gold Miners - Gold mining stocks

However, it is not concerning because of 2 reasons.

The first reason is that Friday’s move higher took place on relatively low volume. The volume was about half of what we saw during Thursday’s decline, so we are not excited about this move, especially that the general stock market rallied substantially.

The second reason is the same reason that we covered in greater detail in Friday’s Alert: the miners to gold ratio moved to an extreme level, which signaled a local top in the past and was a quite reliable factor.

Overall, the outlook remains bearish.

Short-term US Dollar price chart - USD

In the recent alerts, we emphasized that the decline in the USD Index could be the reason (either direct or indirect as the initial cause would be bullish expectations based on the recent weak economic data) behind the strength of PMs. These comments remain up-to-date:

If this was the case, then we have another reason to believe that the days of this rally in PMs are numbered. The USD Index is about to reach the downside target area that is created by 3 support lines: lower borders of 2 declining trend channels and the medium-term support line. Additionally, the cyclical turning point is just around the corner, which makes a turnaround even more likely.

We even saw a move below our target area, but the breakdown is not confirmed at the moment, especially that the USD Index moved back to the medium-term rising support-resistance line on Friday. It would now take only a little more strength to invalidate the breakdowns and for the outlook to improve much more. The latter is even more probable because of the looming turning point. The last visible move was to the downside, so the latter has bullish implications.

Overall, since the situation is developing according to our expectations, we can summarize today’s alert in a similar way to what we wrote previously:

Summing up, , the medium-term decline is not threatened by last week’s temporary upswing – it seems it was simply delayed (and the USD’s reversal along with gold and silver’s decline suggests that we may not need to wait for much longer). The outlook hasn’t changed, so the odds are that the profits that we have on the short position in the precious metals sector will become even bigger in the following weeks.

We will keep you – our subscribers – updated.

To summarize:

Trading capital (our opinion): Short (full position) 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: $17.63, initial target price for the DSLV ETN: $67.81; stop loss for DSLV ETN $44.97
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, here are the stop-loss details and initial target prices:

GDXJ: initial target price: $21.17; stop-loss: $27.31
JDST: initial target price: $14.35; stop-loss: $6.18

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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