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

Gold rallied sharply last week but it turns out that it just canceled most of its gains. Silver didn’t move much, but mining stocks continue to underperform. It seems that last week’s rally is now just a past event without impact on what’s happening this week. But is this really the case?

Most factors support the above theory, but not all of them. In order to succeed in investment and trading, one needs to be focused and as objective as possible, as any emotional approach or an attempt to “tell” the market what it should do is likely to ultimately lead to wrong investment decisions. Keeping the above in mind, let’s start our analysis with taking a look at the gold market (charts courtesy of http://stockcharts.com).

Gold declined and it moved visibly back below the 50-day moving average. It also invalidated the move back above the lower of the rising support lines. The implications are bearish but not strongly bearish, because gold remains well above the declining red support line. There was no sell signal from the Stochastic indicator either.

Consequently, the situation in gold looks bearish, but insignificantly so – it’s still much closer to being neutral than to being strongly bearish.

As we wrote earlier today, silver once again didn’t do much. If silver breaks above the declining support line and rallies sharply, it will quite likely be a temporary move that will signal that the next big slide is just around the corner. Such action would serve as a bearish confirmation – for now, it remains to be seen.

In the case of mining stocks the situation is… rather unclear, which might appear strange given that the above chart features an invalidation of the previous breakout. The reason is that the GDX ETF is only one of the proxies for mining stocks and the other ones (the HUI and XAU indices) don’t confirm this signal. The HUI Index is well above the line analogous to the declining red support line visible above and the XAU Index is right at such an analogous line.

The move in GDX is indeed very bearish on the surface, but the lack of confirmations makes the situation only a little bearish.

The short-term outperformance of mining stocks relative to gold that we saw last week still has bullish implications. Please note that in October 2014 we saw a similar situation – the RSI based on the GDX to GLD ratio moved back above 30 and then declined once again. Back then, the decline in the ratio continued, but so did the corrective upswing in gold. The implications of the above chart are bullish, but not very strongly bullish.

Let’s not forget about the context.

The USD Index moved a bit higher this week, but the short-term trends in the U.S. currency remain down. Moreover, if we take into account last week’s slide, we’ll see that this week’s move higher hasn’t taken the USD above the 61.8% Fibonacci retracement – which means that the move technically remains down and that this week’s rally is just temporary action.

There are quite a few important long-term support levels slightly above the 92 level, so the downside is not that significant, but a move to this area is quite likely to generate some additional strength in the precious metals sector.

Summing up, the situation in the precious metals market deteriorated yesterday. Miners continue to underperform and gold canceled most of its previous rally. However, gold didn’t invalidate all of its recent breakouts and the HUI and XAU don’t confirm GDX’s bearish signal. Moreover, the USD Index seems to be vulnerable to another short-term decline, which suggests that perhaps the corrective upswing in the precious metals sector is not over just yet. All in all, the situation in the precious metals market seems more bearish then not, but still not bearish enough to justify opening short positions from the risk/reward point of view.

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

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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