Briefly: In our opinion, speculative short positions (150% of the full position) in gold, silver and mining stocks are justified from the risk/reward point of view.
Gold, silver and mining stocks plunged yesterday, but the most important development was seen in the market that is somewhat less popular. What are the implications?
The mentioned development is the breakdown (or invalidation of breakout, which would have the same implications) in gold in terms of the Japanese yen. Let’s take a look (charts courtesy of http://stockcharts.com).
Gold priced in the yen was recently trading at or slightly above the 3 important resistance lines – the declining medium-term line, the rising medium-term line and another rising line that is based on major, long-term bottoms. Breakouts above all of them were just clearly invalidated. The implications are very bearish for the medium term (in terms of weeks and likely for the next few months).
From the long-term point of view, we see that gold has clearly moved back into the declining red trend channel and that the medium-term outlook therefore remains clearly down. We also saw a very visible sell signal from the weekly Stochastic indicator – the week is not over yet, but since the markets are closed in the U.S. tomorrow, this signal will be in place if we don’t see an invalidation of yesterday’s move today. It’s likely that we won’t get a major rally today, even though a corrective upswing could be seen. All in all, it seems that we will get another major bearish confirmation based on today’s closing prices.
Gold plunged below the 61.8% Fibonacci retracement (based on the most recent upswing), the rising support line and the previous March low. The breakdowns took place on significant volume (which was big especially on a relative basis) and the implications are clearly bearish. Still, a move to $1,227 or so (as a corrective pause), would not surprise us.
Silver topped at the declining green resistance line and the rally appears to be over. Once silver confirms the breakdown below the 50-day moving average, the decline will likely accelerate. The major trend remains down.
Mining stocks declined on huge volume and it appears that the major decline has just begun. The recent price movement continues to be self-similar – the shape of the rally and decline that we saw in October 2015 is very similar to what we see now. The implications are bearish as back then the entire rally was erased.
Moving back to the long-term perspective, we see that the gold stocks to other stocks ratio moved to its long-term resistance line and then moved back down. Based on the importance of the resistance line, it seems that a sizable decline in the ratio (and in gold stocks) is likely just around the corner or already underway.
Finally, please note that the situation in the USD Index is bullish even though the latter declined quite substantially recently. Let’s take a look at the big picture below.
We wrote that the declining red support line was likely to stop the decline and it seems that exactly that was the case. Most importantly, the USD Index appears to be ending its prolonged pause and the next medium-term rally could be very significant. If the move that preceded the consolidation turns out to be similar to the move that followed it, then we can expect to see the USD as high as 118 in the coming months. This may appear unlikely, but when the USD Index was trading at about 80 in mid-2014, the 100 level in the following months also appeared very unlikely – and yet we saw a rally to this level.
Naturally, the implications of the above are bearish for the precious metals sector.
Summing up, the short-term outlook deteriorated greatly based on this and last week’s developments. The medium-term outlook was already bearish, so not much changed in that regard. We do think that the precious metals market remains in a secular bull market and that much higher gold prices will be seen in the following years, but we don’t think that the big corrective decline that’s been in place for a few years is already over. On a short-term basis, it seems that another decline has just started.
While it’s usually the case that we can get at best a 75%-80% probability of a given move taking place (which means that about a fifth of the very probable moves will not happen), in our opinion it seems that the odds for the decline have now increased even higher – to 85% or so. Consequently, we think that a speculative short position is currently justified from the risk to reward point of view.
As always, we will keep you – our subscribers – updated.
To summarize:
Trading capital (our opinion): Short positions (150% of the 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: $973; stop-loss: $1,304, initial target price for the DGLD ETN: $90.29; stop-loss for the DGLD ETN $48.27
- Silver: initial target price: $12.13; stop-loss: $16.62, initial target price for the DSLV ETN: $71.92; stop-loss for DSLV ETN $36.89
- Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $22.57, initial target price for the DUST ETF: $7.60; stop-loss for the DUST ETF $2.16
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: $31.23
- JDST ETF: initial target price: $14.14; stop-loss: $4.05
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
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