Gold & Silver Trading Alert: Gold’s Performance in Light of USD’s Weakness

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Briefly: In our opinion, full (150% of the regular full position) speculative short positions in gold, silver and mining stocks are justified from the risk/reward perspective at the moment of publishing this alert.

The USD Index declined yesterday quite substantially as the British pound and the euro both moved sharply higher likely due to the surprising news of looming elections in the UK. Despite the USD’s slide, gold didn’t decline whereas silver and mining stocks did. What are the implications?

In short, the implications are bearish due to two reasons:

The classic analysis of the relative strength of gold and the USD – gold didn’t rally much (and miners underperformed) despite a good reason to rally in the form of a declining USD – which is a bearish sign.
It could be the case that what we are seeing is the beginning of an end to the Brexit process. Months ago we wrote that we would believe in Brexit when we saw it. The officials have some aces in their sleeves to undo the Brexit vote if they wish to do so. The upcoming elections outcome could “turn out” not to support Brexit. The elections are not directly about Brexit, but if the conservative party loses it, it could be interpreted as a final vote against it and the authorities could say that “people chose Bremain after all” and thus the entire Brexit process could be stopped. Gold rallied sharply right after the Brexit option prevailed, so a contrary outcome of the elections and a move away from the Brexit process could mean that the previous rally would be reversed in its entirety. The likelihood or increased possibility thereof are consequently a bearish factor.

Besides, technically, the USD Index is still very close to the cyclical turning point, so yesterday’s decline shouldn’t trigger a bigger decline, but rather be followed by a reversal shortly. Let’s take a closer look (charts courtesy of http://stockcharts.com).

Short-term US Dollar price chart - USD

Interestingly, if the USD was to repeat yesterday’s performance and the same happened to gold, silver and mining stocks, the former would reach the previous bottom, the rising medium-term support line and the RSI indicator would probably flash a buy signal once again, while gold would not do much and both silver and the miners would decline again.

It seems that whether the USD Index reverses right away or shortly doesn’t make much of a difference for the precious metals market – the implications are bearish either way as once the USD rally resumes with a vengeance, PMs are likely to respond with a big decline.

GDX - Market Vectors Gold Miners - Gold mining stocks

As discussed above, even though the USD declined substantially (in daily terms) and gold moved a bit higher, miners still moved lower, which is a bearish sign. We also saw another sell signal from the Stochastic indicator.

There’s one more thing that we would like to comment on today before summarizing and that is the performance of the financial sector.

XBD - Broker/Dealer Index, proxy for the financial sector. The link between the financial stocks and gold

A few months ago, we wrote that big medium-term moves in the financial sector and in the precious metals sector tended to reflect each other (with the directions being opposite), so one might be curious what to make of the recent decline in the prices of financial stocks.

As you can see on the above chart, the recent decline in financials was actually a move back to the previously broken resistance level (the 2015 high) – a verification of the breakout. Consequently, since the 2015 high was not broken, the decline is not a bearish development, but a bullish one as it seems that the slide is over or extremely close to being over. The opposite can be said about the precious metals market.

Summing up, not much has changed in the precious metals market so far this week and the points made previously remain up-to-date. The situation in the forex market and in financial stocks continues to support lower precious metals prices in the coming weeks.

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

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): Short positions (150% of the full position) in gold, silver and mining stocks are justified from the risk/reward perspective with the following stop-loss orders and initial target price levels / profit-take orders:

Gold: exit-profit-take level: $1,063; stop-loss: $1,317; initial target price for the DGLD ETN: $81.88; stop-loss for the DGLD ETN $44.57
Silver: initial target price: $13.12; stop-loss: $19.22; initial target price for the DSLV ETN: $46.18; stop-loss for the DSLV ETN $17.93
Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $26.34; initial target price for the DUST ETF: $143.56; stop-loss for the DUST ETF $21.37

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: $45.31
JDST ETF: initial target price: $104.26; stop-loss: $10.78

Long-term capital (core part of the portfolio; our opinion): No positions (in other words: cash)

Insurance capital (core part of the portfolio; our opinion): Full position

Please note that the in the trading section we describe the situation for the day that the alert is posted. In other words, it we are writing about a speculative position, it means that it is up-to-date on the day it was posted. We are also featuring the initial target prices, so that you can decide whether keeping a position on a given day is something that is in tune with your approach (some moves are too small for medium-term traders and some might appear too big for day-traders).

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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