Briefly: In our opinion, short (full) speculative positions in gold, silver and mining stocks are justified from the risk/reward point of view.
Mining stocks moved higher last week but it took only one day of this week to erase most of these gains. Why are miners performing so poorly and what does it imply for the rest of the precious metals sector?
In short, it suggests that the precious metals market was very likely just correcting the previous downswing and that the most recent move higher was indeed the result of a combination of unpredictable events, not a sign of true strength in the precious metals market. The implications are bearish. Let’s take a closer look (charts courtesy of http://stockcharts.com).
Gold declined more than $10 yesterday, which corresponded to the USD’s move back up. Consequently, it seems that our yesterday’s comments about the gold-USD link proved correct:
Gold closed the week above the $1,100 barrier, but only insignificantly so - $4 above it. The interesting thing about gold’s Friday session is that it was, to a great extent, a reflection of what happened in the USD Index (which moved much higher initially and gave away most of the gains before the session was over). This has bearish implications for the gold market, because the USD Index is right at the rising support line and thus likely to move higher.
The USD Index is likely to move higher and gold is likely to move lower. In fact, the move back below $1,100 makes the short-term continuation of the decline much more likely. Still, it is not the situation in gold that makes the current outlook so bearish – it’s the situation in silver and mining stocks.
The white metal moved lower yesterday. It didn’t move substantially lower, but it’s not that odd, because the current levels are very close to the 2015 lows and thus provide support. The very important thing here is that once the previous lows are taken out, there is no serious support until silver breaks below $13. Naturally, the implications are bearish, as this means that once silver’s slide starts it’s likely to slide fast and far.
Finally, let’s take a look at the gold stocks. As we wrote earlier, they are underperforming gold and it’s clearly visible on the above chart. Miners are not only well below the early December high, but have now even moved below the late-December high.
In yesterday’s alert, we wrote the following:
In the recent history, gold miners moved above their 50-day moving average 2 times: one time in early 2015 and the second time in April/May 2015. In the first case, gold miners rallied to the 61.8% Fibonacci retracement and reversed and in the second case gold miners declined shortly thereafter. So, if history repeats itself, like it tends to do (even though there are no identical days) we can see either a decline right away or after a small move above last week’s high (to 125 or so). Under such circumstances (looking at the above chart only), opening short positions or considering it seems justified from the risk/reward point of view, not closing them.
The situation described above deteriorated based on yesterday’s price action. The reason is that the situation is now much more similar to what happened in late April and May 2015, than in January 2015. Back in January 2015, gold miners didn’t decline back to the 50-day moving average as soon as they did now. Moreover, when they did (in February 2015) it was right before the most volatile part of the decline.
Consequently, it seems that even if we see another small move higher from here, the implications will remain bearish. In fact, if the situation is indeed similar to what we saw in May 2015 we should keep in mind that back then the decline that followed almost cut the gold stock prices in half. Naturally, the implications are bearish.
Summing up, based on yesterday’s price action, especially in mining stocks, the situation in the precious metals market deteriorated. The outlook remains bearish and the short positions appear to be justified from the risk / reward point of view.
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: $1,143, initial target price for the DGLD ETN: $117.70; stop-loss for the DGLD ETN $74.28
- 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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