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

Gold rallied sharply on Friday as the employment data was extremely and surprisingly bad which made the June rate hike very unlikely. Has gold just started another powerful upswing?

Not necessarily. As we wrote earlier, the report was a big surprise to the market, so the price “had to” rally regardless of the current trend. Corrections happen in all trends and the current downtrend in gold is no exception. The key question is if Friday’s rally changed anything in the outlook and that’s what one can’t say based on only the fact that gold rallied. Again, it had to rally as the data was surprisingly bad. Before we move to the charts, we would like to remind you that gold can rally hundreds of dollars and decline hundreds of dollars without a change in the interest rates and past years serve as a great example (gold declined over $800 without a rate hike, so why would a rate hike be required for gold to decline less in the coming months?).

Having said that, let’s take a look at the charts and see how much changed (charts courtesy of http://stockcharts.com).

The USD Index plunged sharply, correcting 50% of the previous rally. This move doesn’t invalidate any significant support level and as long as the 61.8% Fibonacci retracement is not broken, a retest of the previous low is not likely. Why is the uptrend very likely to continue?

Because the USD Index is right after a move to the very strong and long-term support levels. The above chart didn’t really change based on what happened last week and higher USD values in the coming months are just as likely as they were before Friday’s slide.

We can say the opposite about gold.

Nothing really changed from the long-term perspective and the outlook remains bearish. Last week gold moved about $30 higher and if this move was really a bullish one, one would expect to see a confirmation in the form of significant volume. We saw the opposite – the volume was weak, which suggests that the move higher is just a pause within a downtrend.

On a short-term basis we see that gold moved higher but stopped at the 50-day moving average without breaking above it. This moving average proved important in the recent past by stopping declines in March and April. Since it was broken, it serves as resistance and since it was strong support, it serves as strong resistance.

We saw a buy signal from the daily Stochastic indicator previously, but this indicator is not very effective (please note the false buy signals in June and July 2015), so it’s not really important.

Moving back to the long-term point of view, last week’s move higher was almost entirely a USD-phenomenon. In case of other currencies, gold moved only less than 1% higher. That’s another sign that the move higher on Friday was just a pause within the decline.

In the case of gold priced in the Japanese yen, the difference in prices was smaller. Gold moved less than 0.6% on Friday.

As far as silver is concerned, there was only a $0.19 move higher last week – nothing to call home about, especially that silver remained below the 50-day moving average that had served as support and now it serves as resistance.

The size of the upswing in the mining stocks and the size of the accompanying volume appear very bullish, but only at the first sight. The volume that we saw yesterday was the biggest one we’ve seen this year, but the other 2 days when we saw similar volume during daily upswings, were not followed by gains, but by daily declines. Consequently, Friday’s strength doesn’t really have bullish implications even though it was a big move.

Summing up, the price moves that followed the surprisingly bad employment numbers were significant in the case of the USD, gold and mining stocks, but it doesn’t seem that it was a start of a bigger rally and a change of trend. The market now seems to believe that there will be no interest rate hike this month, but this information is likely already discounted in the prices of metals. Consequently, it doesn’t have to result in any other moves and the trend can resume today or later this week. Let’s keep in mind that gold declined hundreds of dollars despite a lack of change in interest rates, so an increase in rates this or the next month is not required for gold to move lower.

Surprising events, including the release of surprising data will always move the market, but it doesn’t necessarily mean that a trend will change due to it. Based on how high and in what way (volume) gold moved higher it seems that the rally was just pause within a bigger decline, not the beginning of another big rally.

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

To summarize:

Trading capital (our opinion): Trading capital (our opinion): Short positions (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:

• Gold: initial target price: $1,006; stop-loss: $1,317, initial target price for the DGLD ETN: $86.30; stop-loss for the DGLD ETN $43.71
• Silver: initial target price: $12.13; stop-loss: $18.17, initial target price for the DSLV ETN: $65.88; stop-loss for the DSLV ETN $24.16
• Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $26.47, initial target price for the DUST ETF: $47.90; stop-loss for the DUST ETF $8.11

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: $40.13
• JDST ETF: initial target price: $61.74; stop-loss: $9.38

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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Thank you.

Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager

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