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

Just when it looked like gold stocks would break way below 100 (in the HUI Index) after a move below their previous lows, miners showed strength and not only invalidated the breakdown but even managed to close the session higher than the previous one. Are the implications really as bullish as it seems at the first sight?

Not likely. This is indeed a bullish sign, but that’s not the only sign there is and there are many more bearish signs and signals that are still present. Let’s take a closer look (charts courtesy of http://stockcharts.com).

On the above chart, we see that while gold didn’t manage to successfully break below the $1,100 level, it did close the week more than $14 lower and we have just seen a major sell signal from the Stochastic indicator. As a reminder, this indicator is particularly reliable in its weekly version, but not so in the daily one (especially the buy signals based on daily prices are not really reliable). In fact, all sell signals based on the weekly version of the Stochastic indicator in the past 3 years meant/confirmed important tops in the gold price (the implications were alike for silver and mining stocks). The situation has just deteriorated for the medium term (the following weeks and months, but not necessarily days).

The Dow to gold ratio moved back above the rising support line, invalidating the previous breakdown. This means that the ratio is likely to move higher, which is a bearish sign for gold.

There’s nothing new to comment on from the short-term perspective – the daily reversal in gold was neither spectacular nor was it meaningful. It was just another day when gold closed below the neck level of the head-and-shoulders pattern, which has bearish implications.

Silver didn’t do much last week from the long-term perspective – it closed below the 2010 low for another week, which is a bearish sign.

From the short-term perspective, we saw a quite significant turnaround on Friday, but the volume was not huge and this on its own suggests that the move was not very important. Moreover, we’ve seen a few cases in the recent past when this kind of performance resulted in only a small rally or no rally at all. Overall, we don’t think that the situation in the silver market really changed.

On the HUI Index chart we see that the breakdown below the previous lows was invalidated, but the move below the 2003 low wasn’t. The important thing on the above chart is – similarly to what we saw in the gold market – a major sell signal from the weekly Stochastic indicator. As you can see on the above chart, these signals were very important from the medium-term perspective and thus we think that the situation deteriorated from this perspective.

The GDX ETF is the only chart today that features a bullish sign. The bullish sign is a reversal and immediate invalidation of the small breakdown below the previous 2015 lows. This action materialized on relatively big volume (it was not huge, though). The implications are bullish, but only for the short term and only if we consider this chart alone.

It’s much less bullish when we consider what the USD Index did on that day and what other stocks did (stocks rallied).

The USD Index declined once again, and while it doesn’t seem that the trend is down, we would like to emphasize that if the precious metals market was about to rally strongly, then we should have seen some significant strength in gold, silver and mining stocks and we actually saw a mere $0.09 rally in the miners. In light of the USD’s decline, GDX’s performance actually looks average or even a little bearish.

The above chart is the final one for today and perhaps it’s the most important one. It’s so important because of its efficiency. Since 2012 all the cases when we saw a sell signal from the weekly Stochastic indicator have been a confirmation that we just saw a major local top and that we should prepare for much lower prices even if we were going to see some strength in the very short term.

Summing up, even though we could see some temporary strength in the precious metals sector, it doesn’t seem that adjusting our position is justified from the risk to reward point of view. The – uncertain – rally could be a very temporary event (so if one follows, it will not change much, if anything) and if we exit our short positions during the rally, we might not be able to re-enter positions at better prices than those at which we have exited them. It seems best to focus on the medium-term move which seems much more probable than a short-term rally – in fact, we have just seen a few important confirmations that the next big move in the precious metals sector will be down and our – already significant – profits from this trade will become even bigger.

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

To summarize:

Trading capital (our opinion): Short position (full) position in gold, silver and mining stocks is justified from the risk/reward perspective with the following stop-loss orders and initial (! – this means that reaching them doesn’t automatically close the position) target prices:

• Gold: initial target price: $1,050; stop-loss: $1,213, initial target price for the DGLD ETN: $98.37; stop loss for the DGLD ETN $65.60
• Silver: initial target price: $12.60; stop-loss: $16.73, initial target price for the DSLV ETN: $96.67; stop loss for DSLV ETN $40.28
• Mining stocks (price levels for the GDX ETN): initial target price: $11.57; stop-loss: $17.33, initial target price for the DUST ETN: $41.10; stop loss for the DUST ETN $8.54

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: initial target price: $16.27; stop-loss: $24.33
• JDST: initial target price: $16.98; stop-loss: $3.42

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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