Briefly: In our opinion, short (half) speculative positions in gold, silver and mining stocks are justified from the risk/reward point of view.
The precious metals sector moved higher yesterday – even mining stocks rallied after a series of daily declines. Was yesterday’s reversal an important bottom or should we treat it as something normal that doesn’t change the main trend?
In our opinion, the latter is much closer to the truth than the former. Let’s see why, starting with gold (charts courtesy of http://stockcharts.com).
Gold formed a daily reversal candlestick, which seems to be a very bullish phenomenon. Seems, because reversals were seen also during gold’s declines, not only at their ends. Since this candlestick can mean both a reversal and a continuation, we don’t view this action as particularly bullish. The immediate-term trend for gold, however, has improved a bit based on it.
Our yesterday’s comments on the above chart remain up-to-date:
Please note that there were only a few cases in the previous months when gold closed below $1,170. When that happened, it moved to $1,140 quite quickly. Consequently, we will not be surprised to see gold trading in tune with this pattern once again in the coming days.
The situation in the silver market didn’t change – it’s been bearish and it still is. In yesterday’s alert we used the above sentence to describe the long-term picture, but it’s up-to-date also today and in case of the short-term chart.
Silver moved a bit (less than 1%) higher yesterday, but the move didn’t take it above the declining resistance line, thus nothing changed. The move higher was accompanied by low volume, which has bearish implications.
The most important thing – as it’s been the case in the past few days – happened in the mining stock sector. At the first sight – if one focuses on the day-to-day performance of the mining stocks – it may seem that miners showed strength yesterday by moving visibly higher despite gold’s small move lower. However, the context is of utmost importance. This “strong” rally didn’t manage to take miners back above their 2008 lows.
Both the XAU and HUI indices closed below their respective 2008 lows for the third consecutive day. This means that the breakdown is technically confirmed and the odds for another big slide have just increased.
Summing up, the situation in mining stocks deteriorated further, it didn’t change in the case of silver and it slightly improved in the case of gold. Is it a good idea to double the size of the short position in the precious metals sector at this time? It could be, but based on gold’s reversal we think it’s a good idea to wait an additional day to see where metal and miners close the week. If miners (the XAU and HUI indices) remain below their 2008 lows, we’ll have another strong confirmation of their breakdown and if gold doesn’t rally based on yesterday’s reversal, we’ll know that it was very likely a fake bullish signal. This will likely be enough to justifying doubling the size of the profitable short positions.
We will keep you – our subscribers – updated.
To summarize:
Trading capital (our opinion): Short position (half) position in gold, silver and mining stocks is justified from the risk/reward perspective with the following stop-loss orders and initial (!) target prices:
- Gold: initial target price: $1,115; stop-loss: $1,253, initial target price for the DGLD ETN: $87.00; stop loss for the DGLD ETN $63.78
- Silver: initial target price: $15.10; stop-loss: $17.33, initial target price for the DSLV ETN: $67.81; stop loss for DSLV ETN $41.17
- Mining stocks (price levels for the GDX ETN): initial target price: $16.63; stop-loss: $21.83, initial target price for the DUST ETN: $23.59; stop loss for the DUST ETN $10.37
In case one wants to bet on lower junior mining stocks' prices (we do not suggest doing so – we think senior mining stocks are more predictable in case of short-term trades – we 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: $21.17; stop-loss: $28.68
- JDST: initial target price: $14.35; stop-loss: $5.65
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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