Gold & Silver Trading Alert: Gold’s Upside and Downside Targets

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Briefly: In our opinion, no speculative short positions in gold, silver and mining stocks are justified from the risk/reward perspective.

In yesterday’s alert we wrote that staying on the sidelines appeared to be a good idea for the next several days as the short-term outlook became more bullish, even though the medium-term outlook became more bearish (due to the USD’s breakout). Actually, at the moment when our yesterday’s alert was sent, gold’s and silver’s prices were below the entry prices, so the position was closed at a profit.

In yesterday’s session, not much changed – the USD declined a bit, while the opposite was the case with gold, silver and mining stocks. Nothing extraordinary took place.

However, today’s pre-market trading is more interesting. The USD Index is basically flat, but silver jumped up almost $0.30, showing strength. Gold is up as well. The above relative price moves confirm that the precious metals sector really wants to move higher in the short term, and that until it does, daily declines will be limited. Let’s take a look at the USD Index chart (charts courtesy of http://stockcharts.com).

Short-term US Dollar price chart - USD

What’s likely to happen next? The USD Index is likely to verify the breakout above the previous highs. The support levels are between 100 (an extremely round number) and 100.60 (intra-day December 2015 high), which is a quite wide area, so the specific target is unclear, so it doesn’t seem that we can base our entry point in metals and miners on the USD Index alone. We can, however, look for confirmations from the precious metals themselves once the USD is within the target area.

Two very important confirmations would be: the miners’ underperformance and silver’s very short-term outperformance. Another thing would be gold moving a bit above its 300-day moving average (for instance to $1,250).

Long-term Gold price chart - Gold spot price

In addition to moving to the previous 2016 lows, gold moved to the 300-day moving average and the declining red support line – the upper border of the previous trading channel. Consequently, it’s no wonder that we saw a pause here. Does the above imply that a big turnaround will be seen shortly? Not necessarily. The analogy to 2013 remains in place, so we could see some strength, but it’s likely to be limited. In the case of gold, we can expect a rally that is similar to the rally that took place at the end of 2012 and in early 2013. Back then gold moved a bit above the 300-day moving average and to a round number ($1,700). At this time, an analogous move, would take gold to about $1,250. $1,300 could also be seen, but we don’t view it as likely – the move higher would be too big to be similar to what happened in early 2013 and it doesn’t seem that the USD Index would decline significantly enough, to trigger such a big rally in gold.

While we’re at gold’s long-term chart, let’s take a moment to once again briefly go through the “why isn’t the bottom already in” question. In short, because the gold market was not hated enough back in late 2015. Major tops and major bottoms are formed when everyone and their brother gets on a given side of the market. At the top, everyone wants to buy. At the bottom, everyone wants to sell and thinks that the price will fall much further. We’ve been monitoring surveys, predictions, headlines, website traffic, popularity of gold-related search terms in search engines and it doesn’t seem that gold is really hated enough for this to be the final bottom. Naturally, local tops and bottoms need to take place every now and then regardless of the bigger trend, as no market can move up or down in a straight line. There were local bottoms in 2013, in 2014 and in 2015. Why would the December 2015 bottom be THE bottom if it weren’t accompanied by extreme pessimism?

Some may say that the size of the rally that followed confirms that it was indeed the final bottom. We disagree – there were 2 very good reasons for this temporary upswing to be bigger than the previous ones – the NIRP remarks that were not followed by any NIRP-related action and the Brexit surprise (Brexit hasn’t really happened up to this day). If these events hadn’t happened, gold’s rally would have probably been no different than the previous local rallies that we saw in 2013, 2014 and earlier in 2015.

So, if the final bottom is not yet in, then where is gold likely to bottom? This is where technical levels come into play. We have two target areas – one is close to the $1,000 level and the second one is close to the $900 level. These targets will be updated as we move closer to them, but that’s what appears most likely at this moment. Why the former? A combination of a declining medium-term support line and $1,000 as a very round number provides good support. Why the second? There is one reason, but an extremely important one – the 61.8% Fibonacci retracement level. The Fibonacci retracement levels have proven to be a very useful tool in case of the precious metals market and the 61.8% retracement is one of the most important, classic ones. The other 2 (out of 3): the 38.2% retracement and the 50% retracement were already broken, so now the 61.8% retracement becomes a natural, very important target. The important thing is that as long as this level is not broken decisively and the breakdown is not confirmed, from the technical point of view, the entire 2011 – 2016/2017 decline will simply be a big correction after the 2000 – 2011 rally, and not a beginning of another bear market.

Summing up, we are likely to have good technical and fundamental reasons to think that gold will move much higher in the coming years, but we also have good technical reasons to think that gold will move lower in the following months. As far as the short term is concerned, it still seems that we could see higher prices, with $1,250 as a target for a top in gold as the USD Index verifies its recent breakout. It seems likely that the above would create a good opportunity to re-enter speculative short positions and further increase our profits, however, it’s too early to say so today. We will keep monitoring the market for confirmations and report to you accordingly.

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): No positions (in other words: cash and/or positions from our other alerts)

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

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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