Briefly: In our opinion, short (full) speculative positions in gold, silver and mining stocks are justified from the risk/reward point of view.

Gold and mining stocks declined yesterday, but the volume that accompanied this move was low, which has very specific implications given the current situation in the market.

Normally, low volume means that the move in which a given asset just moved is not the true direction and the strength of this signal is much bigger in the case of daily upswings. However, it is generally best to check how a given technique really works on a certain asset before applying it – at times the effect can be opposite to the initially expected one (for instance, breakouts in silver are usually followed by invalidations and sharp declines).

Moving back to gold, let’s take a look at the chart (charts courtesy of http://stockcharts.com).

The volume was indeed low, but in several previous similar cases low-volume declines were in fact the final step before a sharp decline in gold. History tends to repeat itself to a considerable extent, so it’s hard to view the low volume during gold’s decline as a bullish sign.

Moreover, please note that gold’s performance since mid-August can be viewed as a bearish head-and-shoulders pattern. Gold moved to the line that is parallel to the neck level, which means that the 2 shoulders of the pattern are similarly big. This makes the formation more believable. Of course, it will have very bearish implications only after it is completed, but it seems that this it’s completion is a quite likely possible.

Overall, the situation in gold deteriorated once again.

In the case of silver, the situation didn’t change, so we will quote our yesterday’s comments on it as they remain up-to-date:

Silver moved only 2 cents higher, so nothing has really changed since yesterday. Silver didn’t rally above even the first of the classic Fibonacci retracement levels, so technically, the recent move higher is simply a correction and we should expect another decline to follow shortly.

Mining stocks declined once again but – unlike Tuesday’s decline – the move was small. The context is important – on Tuesday the general stock market declined, whereas it moved higher yesterday – and yet miners didn’t rally. The overall implications are bearish (not extremely, but still, bearish).

Overall, once little changed in the precious metals market (and the signal from the low volume in gold has actually bearish implications) and we can summarize today’s alert in the same way as we summarized yesterday’s issue:

Summing up, the situation and outlook didn’t change based on yesterday’s price move and the outlook remains bearish.

The analogy to the similar session (Oct. 15, 2014), gold’s underperformance relative to the USD Index, and other technical signs make us think (our opinion) that much lower prices are in the cards and that the short positions will become much more profitable than they already are (despite natural corrections along the way).

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

To summarize:

Trading capital (our opinion): Short position (full) position in gold, silver and mining stocks is justified from the risk/reward perspective with the following stop-loss orders and initial (! – this means that reaching them doesn’t automatically close the position) target prices:

• Gold: initial target price: $1,050; stop-loss: $1,213, initial target price for the DGLD ETN: $98.37; stop loss for the DGLD ETN $65.60
• Silver: initial target price: $12.60; stop-loss: $16.73, initial target price for the DSLV ETN: $96.67; stop loss for DSLV ETN $40.28
• Mining stocks (price levels for the GDX ETN): initial target price: $11.57; stop-loss: $17.33, initial target price for the DUST ETN: $41.10; stop loss for the DUST ETN $8.54

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: initial target price: $16.27; stop-loss: $24.33
• JDST: initial target price: $16.98; stop-loss: $3.42

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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