Gold & Silver Trading Alert: Implications of Declines in Miners and Silver

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

The price of gold didn’t change much yesterday, but we already saw a move lower in the case of mining stocks and silver. Is gold showing strength or is it simply the last to fall?

Before moving to the chart analysis, let’s keep in mind that no market moves on its own and that moves in other markets can impact what happens in metals and miners. In case of yesterday’s moves, we should keep in mind that the general stock market declined quite visibly, which likely negatively impacted silver and mining stocks. Consequently, the fact that they underperformed gold yesterday, is not really a bearish sign on its own – it’s what was likely to happen given the main stock indices’ performance.

Consequently, the situation didn’t really become much more bearish – it’s still bearish, but also somewhat unclear as far as the short-term is concerned.

Let’s take a look at the charts (charts courtesy of http://stockcharts.com).

Short-term Silver price chart - Silver spot price

Silver moved lower, but the size of the move was not very significant – it doesn’t imply anything by itself. It would be silver’s sudden rally that would serve as a bearish confirmation, not a small decline.

GDX - Market Vectors Gold Miners - Gold mining stocks

Mining stocks formed a bearish reversal yesterday, underperformed gold and it appears that the session had very bearish implications – that is until one focuses on volume. The volume was tiny and as we wrote in the September 21 Gold & Silver Trading Alert:

The volume was not just low – it was extremely low. Can it tell us anything? It suggests extra caution as metals and miners could be on the verge of a sudden upswing - that’s what happened in the previous months.

Early April, late April, early June and late July all included extremely-low-volume sessions and they were all followed by sharp rallies. Since history tends to rhyme, and we have a good reason for metals and miners to rally (FOMC meeting), a sudden price jump would not surprise us.

Miners soared on the following day, as we had expected. Will the same happen today? It’s not very likely, but it’s not unlikely either. The important thing is that this analogy more or less nullifies the bearish implications of the underperformance vs. gold and the reversal shape of the daily candlestick.

Short-term US Dollar price chart - USD

In yesterday’s alert we wrote: the situation in case of the USD Index appears rather unclear for the very short term. It deteriorated as the USD closed below the rising blue support/resistance line. It seems that a move to the rising support lines and the 50% Fibonacci retracement level (or even the 61.8% retracement) could be in the cards in the following days.

If this move materializes, we might get a move up in the precious metals sector and the precise manner in which the PMs would move higher could provide us with strong bearish confirmations, which could in turn result in opening speculative short positions at more favorable prices than the current ones. Still, that’s a big “if”. Whether the above scenario plays out or not, we’ll keep you updated.

Summing up, we’re close to re-opening the short positions in the precious metals sector, but so far we have not received enough bearish confirmations to proceed. The above is about the short-term trends only - the medium-term outlook was bearish and it remains bearish also today. We are monitoring the markets for signs and confirmations of weakness or strength and we will report to you accordingly.

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

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): No positions

Long-term capital (core part of the portfolio; our opinion): No positions

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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