Briefly: In our opinion speculative short positions (full) in gold and mining stocks are currently justified from the risk/reward point of view.
The action in precious metals at the end of last week was not very volatile, but taking a look at the entire week, we see some very interesting developments. Consequently, in today’s alert we’ll focus on the big picture and the changes that we saw based on last week’s prices.
First of all, the general stock market rallied decisively last week and the breakout above the previous highs in the S&P 500 is now confirmed. This makes subsequent rallies more likely. Let’s take a closer look (charts courtesy of http://stockcharts.com).
We previously wrote that that a breakout in the general stock market could have a positive effect on silver and mining stocks, but that this effect was likely to wear off as gold’s impact was more important. It seems that we’re seeing the above process in place. The S&P 500 rallied almost 1.5% last week, breaking and closing visibly (even from the long-term perspective) above the 2015 highs, which makes the continuation of the rally probable.
The volume was not very high, but it was still higher than during the precious week, so it’s not really a bearish sign.
Given the 1.5% rally in stocks one might have expected silver and mining stocks to rally at least that much, but this wasn’t the case. They held up relatively well, but were not able to rally.
Gold declined almost $30 and it’s down about $9 today, at the moment of writing these words. The RSI indicator was a bit above 70 and declined below it, creating a sell signal. The volume was slightly higher than during the previous week’s move up, and the size of the downswing was also bigger than the previous week’s rally. The implications remain bearish.
From the non-USD perspective, gold declined after moving to the rising resistance line (parallel line to the one connecting the most important 2014-2015 bottoms) and after the RSI moved above and then back below the 70 level. The implications are bearish as well.
We were asked to comment on gold’s link to the Japanese yen and we will deliver in today’s alert. In short, the implications of this relationship are bearish for gold as there is a significant, positive correlation between the two and at the same time the yen has just invalidated a breakout above an important resistance level. Invalidations tend to be strong signals, which makes the outlook for both the yen and gold bearish.
The move above 70 in the RSI indicator and then back below it has bearish implications as well – just like what we saw on other charts today.
Once the yen breaks below the rising support line, the sell signal will be confirmed and we will consider opening speculative forex positions, but it’s too early to do so now in our opinion. Nonetheless, the impact of the gold-yen link on the price of the yellow metal is bearish at this time.
As far as silver and gold stocks are concerned, we see that they both declined (despite a breakout in the main stock indices), but they didn’t move low enough to really change the outlook. Consequently, what we wrote last week remains up-to-date:
Silver moved higher on an intra-day (and overnight) basis and since silver is known to outperform in the final parts of a given upswing, it’s quite likely that a reversal is not far away. The next resistance level is at $21.63 (mid-2014 high) and since silver topped at $21.23, it could be the case that the rally is over.
Please note that silver’s intra-day moves are still very volatile and today’s pre-market action serves as a good example – silver moved above $20.60 only to slide to $20.20 in a few hours (and the intra-day low was about $19.20 on Friday). It seems that silver is still too volatile to enter a trading position in it.
Before moving to mining stocks, please note that the volume that we saw last week was significant. We marked similar situations with dashed vertical lines – it was usually the case that significant weekly volume was followed by declines either immediately or shortly.
At the moment of writing these words, silver is trading at about $19.82 (having declined over $0.30) despite a move higher in S&P futures and in the European markets.
As far as gold miners are concerned, they haven’t invalidated their recent breakout above the 2014 yet, but the fact that they didn’t continue to rally along with other stocks is a rather bearish indication. The lack of an invalidation of the breakout made the picture a bit more bullish, but it still remains bearish given the extreme overbought readings from the Gold Miners Bullish Percent Index.
The index finally moved below the extreme 100 reading, but the sell signal that this level indicated by itself (and what the RSI and Williams %R indicators confirmed) remains in place. Similar situations in the past were followed by substantial declines – for instance in 2008 the HUI Index declined by about 300 points in the following months.
Finally, palladium also reached an important resistance line, which may imply a turnaround in it and also in other parts of the precious metals market.
Summing up, the precious metals market seems to be reversing its direction after this year’s upswing. The similarity to 1982 / 1983 that we discussed last week, the recent outperformance of silver, the extreme optimism among gold stock investors and gold making headlines all point to lower precious metals prices in the coming weeks. The gold to yen correlation also seems to have bearish implications. Once gold breaks through its rising support lines, more traders are likely to become convinced that the rally is over and the slide is then likely to accelerate.
As always, we will keep you – our subscribers – updated.
To summarize:
Trading capital (supplementary part of the portfolio; 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 $34.86
- Silver: No position at this time
- Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $32.27, initial target price for the DUST ETF: $47.90; stop-loss for the DUST ETF $4.67
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: $54.43
- JDST ETF: initial target price: $61.74; stop-loss: $3.73
Long-term capital (core part of the portfolio; our opinion): No positions
Insurance capital (core part of the portfolio; 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 signs 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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