Briefly: In our opinion (full) speculative long positions in gold, silver and mining stocks are currently justified from the risk/reward perspective. Being on the long side of the precious metals market with half of the long-term investment capital seems justified from the risk/reward perspective.
During yesterday’s trading gold moved higher once again, and so did mining stocks. The latter outperformed once again and even moved back above their 2014 low. What’s even more bullish is that the above happened without help in the form of a declining USD Index. Can gold and miners still move higher?
Most likely – yes. In short, just as it was the case previously, the situation developed in tune with our expectations and this made the following rally even more probable. In the last couple of days (except for Friday) the USD Index continued to move higher and the precious metals sector refused to move much lower – the declines were small and they were accompanied by low volume. When the USD finally declined – on Friday – gold and gold stocks rallied more significantly and on higher volume.
On Monday, the precious metals sector moved higher without the USD Index’s help, which is another sign of the PMs strength.
The short-term trend seems to be up and the rally is likely to continue in the following days.
Let’s take a closer look at the charts (charts courtesy of http://stockcharts.com).
The situation in the USD Index didn’t change much on Monday, so our previous comments remain up-to-date:
In the previous alerts we emphasized the significance of the long-term resistance that was just reached. It – combined with short-term resistance and the cyclical turning point – was likely to stop the current rally and trigger a correction. It seems that we are seeing the beginning thereof.
The USD Index moved a little above the long-term resistance last week, but this “breakout” was quickly invalidated and the USD ended the week below the key resistance. In fact, the weekly reversal is a bearish sign on its own.
As far as gold is concerned, we see that it moved higher on volume that was lower than on the previous trading day, but not really low and not lower than during the previous downswing. There are no bearish implications based on it.
Gold closed at the price level that is close to the early Dec. high (in terms of the daily closing prices), so we can say that gold reached a resistance level and could pause or correct at this time. Still, that seems rather unlikely (or any correction would likely not be significant) because the U.S. dollar’s decline has not really begun so far. If it materializes, then the price of gold will likely rally regardless of the short-term resistance.
Our comments from yesterday’s alert remain up-to-date:
The $1,260 - $1,280 range seems (…) probable [as a target for the current rally]. (…)
(…) In a way (…) gold looks like it’s about to rally as what happened in the areas marked with red rectangles is similar and both red areas follow green areas that are also similar. The more recent decline (green area) took more time than the previous one, so it’s no wonder that the post-decline consolidation took more time as well. Please note that in both cases we saw gold declining initially around the 50-day moving average, then rallying some more (above the previous high) and then a decline that didn’t take gold below the first local low. In Feb 2014, gold rallied shortly thereafter. Consequently, the implications are bullish.
Will gold stop at $1,260 - $1,280?
That’s just our initial target. Much will depend on the way gold reacts to the dollar’s decline and the way gold stocks react to gold’s performance – we will be monitoring the situation.
The HUI Index (proxy for gold stocks) moved visibly higher yesterday. It rallied above the 2014 low without help from the USD Index and the general stock market, which is a big sign of strength. It’s likely that the rally is not over if gold stocks are able to demonstrate this kind of strength without external help. Our target is the declining black resistance line, but unless gold stocks start to underperform gold and the USD Index (they respond less intensively to its weakness), then a breakout above this line will become probable. It’s not more probable than not so far (not over 50% yet), but this possibility is becoming more and more probable.
The gold stocks to oil stocks ratio moved well above its 50-day moving average, which served as strong resistance many times in the past. Each time that this average was broken, the price went back down. However, this time it moved much higher above it than in the previous cases. The situation in this ratio tells us that this rally is different than the previous 2014 rallies, and the outlook is more bullish than it was in 2014.
The XAU to gold ratio, however, shows us that it’s too early to say that a real change was seen. The ratio is visibly below the declining resistance line, which means that the medium-term trend remains down. Therefore, we can still expect another downturn in the coming weeks, however not necessarily right away, as the resistance has not been reached.
All in all, we can summarize the situation in the same way as we did previously:
Summing up, gold’s and mining stocks’ strength (another day proving it) combined with the likelihood of a relatively big corrective downswing in the USD Index made the situation more bullish not only from the short-term perspective, but also from the medium-term one. The trends in gold, silver and mining stocks remain down, so we are likely to see even lower values of precious metals and mining stocks. However, the odds that this will not be the case have increased. Does the risk/reward ratio still favor staying completely out of the precious metals market with the long-term investment capital? While it’s tempting to aim for buying back exactly at the bottom or extremely close to it, the prudent answer to this questions is “no”. The odds that this rally will become something bigger than just a corrective upswing are too high at this time (we subjectively guesstimate these odds at about 40%). Not everything is in place, but enough happened (or is about to happen, like the likely top in the USD Index) to [be] in with half of the long-term investment capital.
Meanwhile, the trading positions are already (and increasingly) profitable. It seems that they will become much more profitable before the trade is over. As always – we’ll keep you – our subscribers - informed. Since gold and mining stocks moved visibly higher in the recent days, we are moving the stop-loss orders higher and the same goes for the initial (!) target prices for the mining stocks.
To summarize:
Trading capital (our opinion):
It seems that having speculative (full) long positions in gold, silver and mining stocks is a good idea:
- Gold: initial target level: $1,277; stop-loss: $1,196, initial target level for the UGLD ETN: $ 14.00; stop loss for the UGLD ETN $11.59
- Silver: initial target level: $17.46 ; stop-loss: $15.44, initial target level for the USLV ETN: $25.69 ; stop loss for USLV ETN $17.91
- Mining stocks (price levels for the GDX ETN): initial target level: $23.19 ; stop-loss: $19.27 , initial target level for the NUGT ETN: $21.41 ; stop loss for the NUGT ETN $11.94
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 level: $31.47 ; stop-loss: $25.47
- JNUG: initial target level: $52.07 ; stop-loss: $26.41
Long-term capital (our opinion): Half positions in gold, half positions in silver, half position in platinum and half position in mining stocks.
We continue to favor senior mining stocks over junior mining stocks, but this will likely change relatively soon as the SP Junior Long Term Indicator is already below the lower of the signal lines and as soon as it turns back up, we will see a “move from seniors to juniors” signal. As far as senior gold stocks and silver stocks selection is concerned for speculative and long-term investment purposes, we continue to view our tools: Golden StockPicker and Silver StockPicker as the optimal way of choosing them.
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 automated tools (SP Indicators and the upcoming self-similarity-based tool).
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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