Gold & Silver Trading Alert: How High Will Gold Go?

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Briefly: In our opinion, short (full) speculative positions in gold, silver and mining stocks are justified from the risk/reward point of view.

Gold, silver and mining stocks moved higher recently and on Friday the precious metals sector held up relatively well despite a strong move higher in the USD Index – mining stocks even moved quite visibly higher. Will we see a continuation of the rally this week?

That’s much less likely that it may appear based on what happened on Friday. In the past, it was several times the case that gold’s response to a rallying dollar was delayed. It seems that people don’t believe that USD is really breaking higher just yet – after all, it didn’t move above its December 2015 high just yet. Let’s take a closer look at what happened in the precious metals world (charts courtesy of http://stockcharts.com).

Long-term Gold price chart - Gold spot price

Starting with gold’s long-term chart, we see no major changes in the past few days and our previous comments remain up-to-date:

We see that gold approached the declining resistance line and that’s one important factor that alone could suggest opening short positions, not long ones. This line stopped the rally in late 2015 and it’s currently created by 3 major tops: the late 2012 top, early 2015 top and late 2015 top and this makes it a strong resistance.

Back in late 2015 gold moved a bit above this line, so we can’t rule out a move above it this time either, but it’s unlikely that this move would be significant (more than $20+). Gold has moved to this line if we base it on the weekly closing prices. If highs are considered, then this line is at about $1,137 (and gold was only $9 below this level last week).

Short-term Gold price chart - Gold spot price

Gold moved higher by less than $3 on Friday, so our previous comments on the above chart remain up-to-date. The most important issue at this time is the similarity to what happened in May 2015:

For a few weeks, the above chart has been featuring the following description:

“Gold corrected about 50% of the decline in the mid-2015, so a move in gold to this retracement would not necessarily have very bullish implications”.

Gold just moved to this retracement and – as you’ve read many times before, it does not necessarily have bullish implications. In fact, right now, the current move higher is even more similar to the March – May 2015 corrective upswing than it was the case when we wrote about this similarity previously.

The declines (marked in blue) were almost identical. The initial corrective upswing took gold above the 38.2% retracement, but not above the 50% one. Back in 2015 there was another move higher during which gold broke above the 50% retracement, which is what we have just seen as well. Back in 2015 it took about 2 months before gold moved from the bottom to the top and almost the same is the case right now – the post-decline corrective upswing has taken almost 2 months now. The volume one which the previous rally ended is rather similar to what we’re seeing right now. The position of the Stochastic and RSI indicators was very similar as well.

Consequently, gold is repeating a very similar pattern from the past and according to this pattern the yellow metal is likely to decline shortly. Based on the long-term chart we can say that even if it doesn’t, the upside in the short term is likely very limited. Therefore, it is a short position that one should be at least considering now, not a long one.

On top of that, we just saw a sell signal from the Stochastic indicator – in the past these signals started at least short-term declines. Such decline would likely generate further sell signals in other markets and bearish confirmations and could lead to a much bigger decline.

Long-term Silver price chart - Silver spot price

Silver’s long-term picture didn’t really improve despite the recent breakout above the declining red resistance line. Silver is known for its fake breakouts and since this move above the line is smaller than the previous similar “breakouts” (and it has already been erased to a considerable extent), it seems that a move lower will be seen shortly, just like was the case for previous “breakouts”.

Please note that despite the recent strength, silver didn’t invalidate the breakdown below the previous lows in terms of weekly closing prices.

Short-term Silver price chart - SLV ETF - iShares Silver Trust

Silver’s chart had very bearish implications and it continues to have them today and the main reason is the rally right before the cyclical turning point and a reversal at it. Consequently, our previous comments remain up-to-date:

Silver moved higher right at the cyclical turning point, which has bearish implications. If silver is truly in an early phase of a major move higher, then it would be something against practically all similar cases in the recent past. Please note that silver’s sharp rallies at or close to the cyclical turning points were always followed by significant declines and each of them was bigger than silver’s recent move higher. Is silver’s yesterday’s rally really bullish? No.

The implications remain bearish.

GDX - Market Vectors Gold Miners - Gold mining stocks

Miners moved higher on Friday, which can be likely attributed to the strong rally in the main stock indices – the volume seen in the GDX ETF chart suggests that market participants really didn’t believe in this move.

What’s next? We can’t rule out another small rally to the declining resistance line (below $14.5), but such a move is certainly not imminent as GDX is very close to the Fibonacci retracement levels and it’s above the 50-day moving average about as much as it was in early January 2016, right before the decline. Speaking of the 50-day moving average, our previous comments regarding it remain up-to-date:

(…) the sizes of the moves were not very significant and the rally above the 50-day moving average is quite in tune with the previous January 2015 move higher. Moreover, since the move was not significant, we continue to view the current move higher as similar to the previous attempts to break above the 50-day moving average. (…) We marked the similar situations in red. In August 2015, September 2015, December 2015 and earlier in January 2016 we saw breakouts above the 50-day moving average that were similar to the current one and the size of the volume was very similar as well. What happened next? Mining stocks declined – if not right away than within the following couple of days.

There was only one time when mining stocks truly broke above the 50-day moving average and that was in early October 2015. The session when we saw this breakout was not similar to yesterday’s session – the size of the rally and the volume that accompanied it was much bigger than what we saw yesterday.

There were also 2 other attempts to move above the 50-day moving average that were not successful, but their implications are only a little bearish, because the volume was not similar to what we saw yesterday.

The ratios (gold stocks vs. gold and gold stocks vs. other stocks) related to mining stocks continue to have bearish implications:

HUI:GOLD - Gold stocks to gold ratio chart

HUI:SPX - Gold stocks to the general stock market ratio

In both cases the trend remains down, and last week’s performance seems to confirm this. The implications for gold stocks and the entire precious metals sector remain bearish.

Finally, we would like to once again cover the little-known, but quite important signals from the bond market and from the juniors sector.

UST20Y:UST1Y - Gold and ratio of US Treasury Yields

There is a very specific way in which the bond market provides medium-term signals to gold traders. Whenever long-term yields sharply and quickly outperform the short-term yields (as measured by the Rate of Change indicator) we see a top in gold – usually a major one – please take moment to examine the above chart and see how often this was the case and how important tops were accompanied by this kind of signal. We have recently seen this important signal once again.

GDXJ:SPY - Junior miners to other stocks ratio chart

The interesting thing is that despite last week’s rally in the precious metals sector, the situation in the GDXJ to SPY ratio was actually bearish.

As a quick reminder, plotting the Stochastic and Rate of Change indicators on the above ratio allow us to detect moments when juniors are right after a short-term outperformance relative to other stocks and these were very often (in the past few years – always) periods right before yet another decline in gold.

We are currently seeing the indicators in the position that suggests another slide is just around the corner. The Stochastic indicator is not very far from its moving average, so the signal is not crystal clear, but still, it’s present. Just as we wrote earlier today – once gold and junior mining stocks decline some more, this signal will likely become more visible and lead to further – major – declines.

Summing up, despite a $20 move higher in gold last week and a 23-cent move higher in silver, it doesn’t seem that the outlook for the precious metals market has indeed improved. The recent move higher continues to be very similar to the previous corrective upswings and there are many signs suggesting that it’s already over or about to be over.

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

To summarize:

Trading capital (our opinion): Short positions (full) 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: $973; stop-loss: $1,143, initial target price for the DGLD ETN: $117.70; stop-loss for the DGLD ETN $74.28
Silver: initial target price: $12.13; stop-loss: $14.83, initial target price for the DSLV ETN: $101.84; stop-loss for DSLV ETN $57.49
Mining stocks (price levels for the GDX ETF): initial target price: $10.23; stop-loss: $15.47, initial target price for the DUST ETF: $31.90; stop-loss for the DUST ETF $10.61

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: $15.23; stop-loss: $21.13
JDST ETF: initial target price: $52.99; stop-loss: $21.59

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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