Gold & Silver Trading Alert: Miners Outperformance… Ends?

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November 5, 2014, 5:58 AM

Briefly: In our opinion speculative short positions (full) in gold, silver and mining stocks are justified from the risk/reward perspective. We are keeping the stop-loss levels at yesterday’s levels, so in a way the “increased profits” remain locked-in, and at the same time, we’re keeping a chance of increasing them.

Today’s commentary will be very short and the reason is that yesterday’s session developed exactly in tune with what we expected to see as a negation of the previous bullish signal.

Yesterday, we mentioned that gold stocks outperformed gold, but we also mentioned that it was not something to call home about, as it was just a one-day event and actually something natural after a sharp and big decline. The event was supposedly bullish. After yesterday’s session we know that it was indeed a one-day event as gold stocks declined even though gold moved a bit higher. That’s the opposite signal to what we saw on Monday and overall, taking these 2 days into account at the same time, we have no outperformance and no underperformance. In other words, the previous supposedly bullish signal is no longer relevant, not even to the small extent that it might have been yesterday.

At the same time gold closed below its 2013 low for a third consecutive trading day yesterday, so the breakdown below it is now confirmed. From this perspective, the situation is now even more bearish than it was yesterday.

Other than the above, nothing changed in the precious metals market and what we wrote in yesterday’s and Monday’s alerts remains up-to-date (please read the latter if you haven’t done so already).

Consequently, we will summarize today’s alert exactly as we did yesterday.

Summing up, Summing up, the situation in the precious metals market was bearish and metals and miners were likely to decline – and they did. Will they decline further based on gold’s major breakdown (after all, gold didn’t break down from more than a yearly consolidation pattern to decline $20) or will the resistance and turning point in the USD Index trigger a bigger upswing in the precious metals sector?

As always, there are no sure bets in any market, but we think that the short-term resistance in the USD Index (given the metal’s negative correlation with the U.S. dollar) is much less important than the breakdown in silver and gold. The critical support in gold and silver was broken and they are likely to decline significantly now. They could still turn around and rally today or in the coming days, but they could also continue their decline and if they do, they could drop fast and far – and it would be a waste not to take advantage of this move.

Consequently, we think that instead of closing the short positions, we will keep them “almost closed”. By this we mean moving the stop-loss orders lower once again. In this way, if gold, silver and mining stocks rebound, the short positions will be automatically closed and substantial profits will be secured anyway. If metals and miners continue to slide, we plan to continue to move the stop-loss order lower and thus make the substantial profits from the current short positions even bigger. Please note that by entering a new stop-loss order, you are effectively making sure that the current trade is profitable no matter what the market does.

The fact that XAU and HUI moved very close to their 2008 lows and the HUI to gold ratio moved to its 2000 low doesn’t have to mean that the bottom is in at this time. Gold moved below its 2013 low and it doesn’t look like it’s ended a huge triangle-shaped consolidation to decline $20 or $30 dollars. If it continues to slide, the move could be very sharp and miners would likely follow.

The miners’ outperformance that we saw earlier this week was just nullified and the situation became bearish based on the confirmation of gold’s breakdown below the 2013 low.

We will continue to monitor the situation and report to you – our subscribers – accordingly.

To summarize:

Trading capital (our opinion):

It seems that having speculative (full) short positions in gold, silver and mining stocks is a good idea:

Gold: initial target level: $1,107 ; stop-loss: $1,187, initial target level for the DGLD ETN: $96.83 ; stop loss for the DGLD ETN $79.90
Silver: initial target level: $15.07 ; stop-loss: $16.56, initial target level for the DSLV ETN: $93.83 ; stop loss for DSLV ETN $72.29
Mining stocks (price levels for the GDX ETN): initial target level: $14.07 ; stop-loss: $18.33, initial target level for the DUST ETN: $73.11 ; stop loss for the DUST ETN $38.03

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 level: $18.57 ; stop-loss: $26.53
JDST: initial target level: $59.49 ; stop-loss: $25.80

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.

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.

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 automated tools (SP Indicators and the upcoming self-similarity-based tool).

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.