Briefly: In our opinion no speculative short positions are currently justified from the risk/reward point of view. We will likely re-enter the short positions shortly.
The precious metals sector showed strength on Friday by not only refusing to decline despite a move higher in the USD Index, but actually moving higher. This bullish signal was not invalidated in Monday’s pre-market trading. What are the implications?
The above is a relatively strong bullish sign but only for the very short term. It doesn’t change the medium-term trend for the USD Index (or the upside potential thereof) or for the precious metals market, but it could generate another quick rally. In light of the above, if we didn’t have any speculative position open at this time, we wouldn’t be opening it at this time, which means that existing short positions are no longer justified from the risk to reward perspective. Since the trend didn’t change, we will very likely re-open the position, but at this very moment, the risk of keeping a short position appears too big.
Let’s take a closer look (charts courtesy of http://stockcharts.com).
The medium-term outlook remains bullish for the USD Index as the latter verified the breakout above the 92 level and it remains well above it. The upside potential is great as the moves that follow the consolidation (2015 – today is a big consolidation after a big rally) tend to be similar to those that preceded it. On the above chart we illustrated this tendency with green lines – it appears that USD is just starting its major upswing.
On the short-term chart we see that the USD Index moved close to its April highs on Friday, but didn’t close above them. It could be the case that the traders are now betting on a reversal and that’s why gold and silver didn’t decline yet. Consequently, another big daily slide in metals could be seen once USD breaks above the April highs. This, however, may not happen right away, but in a week or so. Why? The cyclical turning point could still result in a temporary move lower and there is a seasonal tendency for the USD Index to correct the rally in mid-May.
Still, a small decline in the USD is not likely not change much because of the long-term chart and its implications – the rally is likely to resume.
The above would not matter much for the precious metals market (we don’t expect the correction in the USD Index to be significant) if it wasn’t for the strong performance of gold and silver relative to the moves in the USD Index that we saw on Friday and in today’s pre-market trading. This suggests that while a move in USD is likely to be small and temporary, the corresponding moves in gold and silver will likely also be temporary, but not necessarily small. In light of the latter it seems to be a much better idea to re-enter the short position at higher prices instead of keeping them throughout the move.
The short-term precious metals charts don’t feature significant additional signals in addition to what we covered in Friday’s alert.
Gold, silver and mining stocks have all moved a bit higher on relatively low volume – nothing concerning or bullish by itself. The bullish thing is that it happened along with a sizable rally in the USD Index and a decline in the general stock market. In light of the latter, we should have seen a decline – likely a big one. We didn’t, and that by itself is a bullish sign. It would have not been that important if we already saw an invalidation thereof today – but instead we are seeing more of the same as gold moved about $10 higher despite lack of action in the USD Index.
Consequently, a very short-term move higher (that will likely be over this week) has just become much more probable.
What are the medium-term implications of the above? There are none – the very short-term strength is bullish only for the following days; it doesn’t say anything about the following weeks.
Gold, silver and gold stocks declined last week, but there’s not much special about this decline yet. Gold and silver didn’t close below their March 2015 and 2016 highs, respectively, so there was no additional bearish signal. We don’t view HUI’s breakout above the 2015 high as confirmed either as we saw an intra-day move back below the intra-day high of 2015, so in a way the breakout was invalidated. It wasn’t the case when looking at daily closing prices, though, so the outlook didn’t deteriorate, but we wouldn’t say that improved either.
As far as silver is concerned, the outlook remains bearish as silver’s breakout above the mid-2015 high was clearly invalidated and silver has been declining since that time.
There are a few other charts that confirm the above.
From the non-USD perspective, gold simply moved back to its 2015 high – there was no breakout and the current move is likely to be followed by a decline, just like the previous attempt to break above it.
Gold priced in the Japanese yen is also after breakdowns below all long- and medium-term support lines. The implications are bearish but they are of medium-term nature, so they will not prevent a possible short-term upswing this week.
Finally, the junior mining stocks have not broken above the combination of 2 important resistance levels: the 2008 low and the declining long-term resistance line. The implications are bearish not only for juniors but also for other mining stocks and metals.
Summing up, the medium-term outlook for the precious metals sector remains down despite gold making the headlines and despite short-term strength. However, on a short-term basis and based on gold’s and silver’s ability to move higher despite a move higher in the USD Index, it appears that we may see a rally this week and consequently we are temporarily closing the speculative short positions with a plan to re-enter them later this week or in the following week, when the risk to reward ratio becomes more favorable.
As always, we will keep you – our subscribers – updated.
To summarize:
Trading capital (our opinion): No positions
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, Gold & Silver Fund Manager
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