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

The USD Index soared once again and the precious metals sector – especially mining stocks – responded by declining once again as well. The continued underperformance of mining stocks seems to confirm the current direction of the PM sector. Is the final plunge in the precious metals sector underway?

It could be the case, but the answer depends on what kind of move one would want to call a “final plunge”. If by that one means a sudden slide to our final target areas, then we don’t think that this will happen this or the next week – probably not even the next month. However, if by “plunge” one means a starting point of a move that will take the entire precious metals lower, but that will also include pauses and corrections to the upside, then it’s certainly possible and likely.

It’s not a sure bet, though and the main reason for it is the situation in the silver market (charts courtesy of http://stockcharts.com).

Silver moved visibly lower yesterday, but after the daily close it turned out that it was not enough for us to see an important breakdown below the declining support / resistance line. Consequently, the situation in silver has not deteriorated just yet, but it’s still likely to deteriorate shortly.

The situation has definitely deteriorated in the case of gold stocks, though.

In yesterday’s alert, we wrote the following:

The HUI Index is moving lower in tune with our expectations. Gold stocks moved lower after the point marked with the vertical green dashed line. If we now see a sell signal from the Stochastic indicator (and it seems very likely that we will), it will serve as a confirmation that much lower values are to be expected relatively soon.

We are very likely to see such a sell signal because of the short-term breakdown that we can see in the GDX ETF.

The breakdown in the GDX ETF indeed resulted in a sharp move lower and, in consequence, a sell signal from the weekly Stochastic indicator for the HUI Index.

This sell signal is not only important and very bearish on its own, but it’s also the case that the situation in the Stochastic indicator is now very similar to what we saw previously before major declines. The implications are – again – bearish, as the history tends to repeat itself to a considerable degree.

Finally, we saw a breakdown in gold. It was not confirmed and it was a breakdown below the line based on daily closing prices (the line based on the intra-day lows remains unbroken), but still, that’s a bearish signal. When we see additional 2 closes below the rising, blue line, we will have a very good chance of seeing much lower prices shortly, as the breakdown will be confirmed at that time. For now, the outlook is bearish (based on the breakdown and the fact that it was accompanied by huge volume), but not extremely bearish as far as short term is concerned (the situation remains very bearish in the medium term).

Summing up, the situation deteriorated yesterday, but not very significantly. We still have to see the invalidation of the silver’s breakout before we can say that the corrective upswing is (very likely) over. Mining stocks confirmed the move below their rising support line and we saw a major sell signal from the Stochastic indicator for the HUI Index. The overall outlook for the precious metals sector remains bearish – it seems that the final bottom is still ahead of us.

We will keep you – our subscribers – updated.

To summarize:

Trading capital (our opinion): Short (full position) 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: $18.13, initial target price for the DSLV ETN: $67.81; stop loss for DSLV ETN $38.44
• 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, 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.

=====

Latest Free Trading Alerts:

There was depreciation yesterday and on increased volume. Does this mean that the big move has already started? We offer our view on the situation in the Bitcoin market.

Bitcoin Trading Alert: Bitcoin in Potentially Volatile Territory

=====

Hand-picked precious-metals-related links:

Commodities’ Biggest Drop of 2015 Underscores Goldman Bear View

Russia boosting gold holdings as defence against 'political risks'

What India’s Gold Monetization Program Means for You

=====

In other news:

Bernanke sees no risk of hard landing in China, bullish on U.S. economy

The Fed considers a more seasoned approach

This is giving a sense of a major top: Jim Paulsen

The G-7's Problem: Can the World Deal With a Greek Default?

=====

Thank you.

Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief

Gold & Silver Trading Alerts
Forex Trading Alerts
Oil Investment Updates
Oil Trading Alerts