Briefly: In our opinion, short (full) speculative positions in gold, silver and mining stocks are justified from the risk/reward point of view.
The decline in the precious metals sector continues as expected. The last few days seem to have been just a pause, not a major bottom as gold and silver are moving lower once again and the USD Index seems to have formed a local bottom. How low can the precious metals sector slide before the final bottom is indeed formed, or at least a major corrective upswing?
In short, our thoughts on the above remain up-to-date. We think that we will see some sort of corrective upswing relatively soon, but not immediately. Let’s take a look at the charts (charts courtesy of http://stockcharts.com).
From the long-term perspective, nothing changed and our previous comments remain up-to-date:
Gold declined more than $40 this week and there was no move back above the previously broken 2014 lows. In fact, gold’s lack of a bigger move higher (especially in light of yesterday’s decline in the USD Index) is a bearish sign as with each passing day when gold stays below the 2014 low, the breakdown becomes more and more important. With another weekly close below this level, we’ll say that it’s confirmed and the implications will be very bearish for the medium term.
The closest strong support is created by the 2010 low (slightly below $1,050), and this is where the corrective upswing is quite likely to start, also based on the analogy to what happened in 2013. We discussed the above in greater detail in Tuesday’s alert and if you haven’t had the chance to read it previously, we suggest that you do so today.
Not much changed on the short-term chart either:
On a short-term basis, we see that gold’s Tuesday’s move higher was actually a verification of the breakdown below 3 important support lines, which now turned into resistance. The breakdown below the 4th one was not yet confirmed, but confirmation of the breakdown below 3 of them is much more important. Again – the implications are bearish.
The RSI indicator is extremely oversold at this time, which suggests that gold is likely to move higher shortly, but please note that when RSI was previously as oversold was not after a breakdown below critical support (and a confirmed breakdown below several other support levels). This time is different not because we expect the RSI to work differently under the same set of circumstances. It is different because the circumstances are indeed different from what we saw in the previous months.
The green lines on the above chart emphasize that the size of the recent decline was almost the same as the previous one, which actually supports the bullish case for gold, but – just as it is the case with RSI – at this time we have a major breakdown (below key, medium-term support) to consider and the latter seems to be a more important factor. If we get a corrective upswing from here it will very likely be to the previously broken 2014 low, so the upside is rather limited at this time.
Silver continues to move lower in a rather steady way, which suggests that the decline is not over. Silver tends to slide in a very visible way at the end of a major decline and we haven’t seen this important confirmation so far.
There’s not much new that we can say about the silver market other than the above, so let’s move to the mining stocks.
In yesterday’s alert, we wrote the following:
The thing that we would like to emphasize is just how small yesterday’s “rally” is compared to the size of the previous decline. That’s right – it’s not even visible from this perspective and that says a lot about its importance. The lack of a visible rally after a sharp decline is also quite meaningful – the move was not accidental. It really is the move that is in tune with the current trend and not an event-driven temporary phenomenon.
Of course, no market can move in on direction without periodical corrections and mining stocks are no exception, but the fact that we didn’t see an immediate reversal is quite important. Will we see a reversal in miners before the final bottom? Most likely yes. Is it underway? In our opinion, most likely no.
In short, the above remains up-to-date and it seems that the decline is already continuing.
It’s clearly visible on the above GDX chart. We saw a new intra-day low and also a breakdown in terms of daily closing prices. The implications are bearish.
Before summarizing, let’s take a look at the performance of the junior mining stock sector.
Juniors have clearly broken below the 2008 and 2014 lows and they are now trading below the 600 level. The recent breakdowns in gold, HUI and XAU were clearly not accidental and juniors provide another confirmation.
Other than the above, not much happened on the precious metals market yesterday, and practically everything that we wrote on Monday remains up-to-date. Consequently, if you haven’t had the chance to read Monday’s alert so far, please do so today.
Summing up, the situation in the precious metals market is critical and it seems that we will get a corrective upswing relatively soon as there is too much negativity regarding gold in the mainstream media. The odds are that this will not be the final bottom, but a local one. The coming move higher, however, is something that we would like to trade. Consequently, we have recently adjusted our target levels in our speculative positions (below) and we changed them from “initial target prices” to “profit-take orders”. This means that when these levels are hit, we think the positions should be exited (as it will seem justified from the risk/reward perspective).
Important note: when only one of these levels is hit (for example only the target for gold), we think that exiting the entire position (in gold, silver and miners) is appropriate from the risk/reward perspective – without waiting for all targets to be reached.
We might consider going long with the speculative capital (or just to close the short position) or even getting back in the market with part of the long-term investment capital, but we are not doing so right now. In other words, we might make changes in the long-term investment part of the portfolio but that’s not certain – it depends on the signals that we get.
On a side note, if you’re not familiar with the way we choose individual gold stocks and silver stocks, we suggest that you become familiar with our tools: Golden StockPicker and Silver StockPicker – these are the tools that we will utilize to select miners to buy when getting back on the long side of the market, as they have greatly enhanced the performance of the simple buy-and-hold approach.
We will keep you – our subscribers – updated.
To summarize:
Trading capital (our opinion): Short position (full) position in gold, silver and mining stocks is justified from the risk/reward perspective with the following stop-loss orders and profit-take orders:
- Gold: profit-take order: $1,053; stop-loss: $1,208, profit-take order for the DGLD ETN: $99.92; stop loss for the DGLD ETN $66.49
- Silver: profit-take order: $14.33; stop-loss: $17.11, profit-take order for the DSLV ETN: $75.46; stop loss for DSLV ETN $38.32
- Mining stocks (price levels for the GDX ETN): profit-take order: $12.33; stop-loss: $18.73, profit-take order for the DUST ETN: $46.46; stop loss for the DUST ETN $14.08
In case one wants to bet on lower junior mining stocks' prices (we do not suggest doing so – we think senior mining stocks are more predictable in case of short-term trades – we if one wants to do it anyway, we provide the details), here are the stop-loss details and initial target prices:
- GDXJ: profit-take order: $16.73; stop-loss: $25.78
- JDST: profit-take order: $21.67; stop-loss: $5.79
Long-term capital (our opinion): No positions
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 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
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