Briefly: In our opinion, full (150% of the regular full position) speculative short positions in gold, silver and mining stocks are justified from the risk/reward perspective at the moment of publishing this alert.

The precious metals sector moved lower yesterday and the decline was particularly visible in case of the mining stocks. Gold didn’t move much, but silver erased more than it had gained on Wednesday. What can we infer from this kind of action and how can it impact the following days?

Let’s start the discussion with the examination of the GDX ETF chart (charts courtesy of http://stockcharts.com).

In yesterday’s alert we noted the following regarding the mining stocks’ reaction to the moves in gold:

The interesting thing to watch yesterday was the intra-day performance of mining stocks compared to the price of gold. Mining stocks moved higher along with gold (not rallying as significantly, but still), but when gold gave away only a part of its gains miners reacted by declining more significantly. As gold moved higher – and above the previous intra-day high – miners also moved higher, but not above the previous intra-day high. This action took place a few times and it shows how reluctant mining stocks are to react to positive developments in the gold market.

The same kind of reaction is present also in terms of days. Yesterday, gold moved and closed the session several dollars below the previous close, but it didn’t erase the entire rally – it didn’t even erase half of the daily rally. At the same time mining stocks declined and not only erased the previous day’s decline, but also erased a week of daily rallies (yesterday’s close was the lowest since May 11th).

Moreover, the volume that we saw yesterday was the highest reading in May – the decline appears to be more representative of the current market sentiment than the previous days’ upswings.

Miners definitely don’t want to react to bullish news but are eager to react to bearish ones. The implications for the entire precious metals sector are bearish.

As mentioned earlier, gold didn’t erase a large part of the previous upswing – at least not yet. However, it did move to the Fibonacci retracement and it closed back below the lower of the rising (red) support lines. The small breakout above the latter was therefore invalidated. From the technical point of view, it seems that the breakdown below the rising red support line was verified – not invalidated.

Silver declined visibly and erased more than Wednesday’s entire daily rally. Some may say that silver reversed before the end of the session, which might appear bullish, but this doesn’t seem to be the case. Please note that this is exactly how the big April – May decline started – by a daily decline that was partially erased before the end of the session.

Summing up, it seems that silver and mining stocks were the first to resume the decline, just as they were the first to move higher several days ago. The technical picture and outlook for gold, silver and mining stocks remain bearish. The major (unconfirmed, but still) breakdown in the price of palladium serves as an additional bearish confirmation.

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

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): Short positions (150% of the full position) in gold, silver and mining stocks are justified from the risk/reward perspective with the following stop-loss orders and initial target price levels / profit-take orders:

• Gold: exit-profit-take level: $1,063; stop-loss: $1,317; initial target price for the DGLD ETN: $81.88; stop-loss for the DGLD ETN $44.57
• Silver: initial target price: $13.12; stop-loss: $19.22; initial target price for the DSLV ETN: $46.18; stop-loss for the DSLV ETN $17.93
• Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $26.34; initial target price for the DUST ETF: $143.56; stop-loss for the DUST ETF $21.37

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: $14.13; stop-loss: $45.31
• JDST ETF: initial target price: $417.04; stop-loss: $43.12

Long-term capital (core part of the portfolio; our opinion): No positions (in other words: cash)

Insurance capital (core part of the portfolio; our opinion): Full position

Please note that the in the trading section we describe the situation for the day that the alert is posted. In other words, it we are writing about a speculative position, it means that it is up-to-date on the day it was posted. We are also featuring the initial target prices, so that you can decide whether keeping a position on a given day is something that is in tune with your approach (some moves are too small for medium-term traders and some might appear too big for day-traders).

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 signs 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, Gold & Silver Fund Manager

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