Briefly: In our opinion, short (full) speculative positions in gold, silver and mining stocks are justified from the risk/reward point of view.
Even though many signs have been pointing to lower precious metals prices, we just saw a daily upswing. Were the bearish signs just invalidated and is the final bottom for this major decline already behind us?
In short, we think it’s unlikely. Let’s examine the charts and see why we think this is the case. Let’s start with gold (charts courtesy of http://stockcharts.com).
In our Friday alert we wrote the following:
As mentioned earlier, Friday’s move was not meaningful because of the “quadruple witching” which could have made the move artificial. Moreover, the volume that accompanied the move to the upside was smaller than what we had seen previously. Consequently, the outlook remains bearish.
The implications of the price-volume link remain bearish also today. Gold moved higher yesterday, but the move materialized on relatively low volume. Consequently, yesterday’s price action is most likely just another counter-trend move higher within a bigger decline.
Silver has once again moved higher and this time it managed to close above the declining resistance line. Is it very bullish? If it wasn’t silver, it might have been bullish, but silver is known for its fake breakouts, which are followed by sharp declines. Consequently, we don’t really view yesterday’s price action as something really significant.
From the long-term point of view, silver once again moved to the declining red resistance line – there was no major breakout and the trend remains down.
As far as the situation in the HUI Index is concerned, not much changed from the long-term perspective on Friday and yesterday and our previous comments remain up-to-date:
The HUI Index moved visibly lower and it’s about to create a bearish head-and-shoulders pattern. The target based on this formation is the 80 level, which was our next interim target anyway based on the early 2002 low and other calculations (the gold price target and the gold stocks to gold ratio analysis). Consequently, this target is even more likely to really hold the decline (at least for some time). Please note that there is also another level to which gold stocks could decline – the 60 level.
It seems unrealistic – we know – but did 106 seem realistic when the HUI was trading above 600 just a few years ago? The fundamental outlook for the precious metals market remains bullish in our view, but that doesn’t change anything (!) regarding the short term or even the medium term, given a strong downtrend. Markets are logical only in the long run, and emotional in the short run. Consequently, it is possible for the HUI Index to become even more oversold than it is right now before the final bottom is in.
As far as the short-term picture is concerned, miners moved higher, but not above the declining resistance line. Consequently, yesterday’s rally changed rather little. The particularly interesting thing is that gold is almost at its previous December high while the GDX ETF corrected only about half of the December decline. The relative underperformance is a bearish sign.
Speaking of relative performance, gold stocks vs. the general stock market ratio is on the verge of breaking below a very important low. The implications of this move will be very bearish and since the trend remains down (note the declining resistance line), it is likely that we will indeed see the above-mentioned breakdown.
The decline in the above ratio is positively correlated with gold’s decline so a breakout here could very well translate into lower gold prices. The implications are bearish. It seems that the profits on the current speculative short position will become much bigger – after all our target of $960 in gold is well below the current market price and if the analogy to the 2013 slide is indeed in place, then we will likely not have to wait long before this level is reached.
The upcoming year will likely start with major events in the precious metals world and paying extra attention to this market for the first few months should prove well worth it.
As always, we will keep you – our subscribers – updated.
To summarize:
Trading capital (our opinion): Short positions (full) 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: $1,107, initial target price for the DGLD ETN: $117.70; stop-loss for the DGLD ETN $81.84
- Silver: initial target price: $12.13; stop-loss: $14.83, initial target price for the DSLV ETN: $101.84; stop-loss for DSLV ETN $57.49
- Mining stocks (price levels for the GDX ETF): initial target price: $10.23; stop-loss: $15.47, initial target price for the DUST ETF: $31.90; stop-loss for the DUST ETF $10.61
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: $15.23; stop-loss: $21.13
- JDST ETF: initial target price: $52.99; stop-loss: $21.59
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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