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

Miners started the week by moving lower but managed to close the session above Friday’s close – thus forming a visible reversal pattern. Since miners were the weakest part of the precious metals sector, does the above indicate a major turning point also for gold and silver?

Let’s take a look at the charts (charts courtesy of http://stockcharts.com).

Gold did the opposite of what it’s been doing in the past previous trading days – it moved lower initially, then reversed, but ultimately closed the session lower. The volume was slightly higher than what we saw during previous day’s move higher, so the implications are rather bearish (not overly bearish, because gold managed to cancel some of the declines before the end of the session).

The more bearish development, though, was seen in the Dow to gold ratio.

This ratio compares stocks’ performance (the general stock market) to gold. Declines in the ratio usually correspond to rallies in gold and vice-versa. The above chart features a breakout above the important resistance – the 15 level. Since, this ratio moved above its 2008 high, in a way, gold has already broke below its 2008 low. Of course it doesn’t mean that gold is as oversold – it means that a technical barrier was broken and that the ratio is likely to move higher in the coming weeks. This has bearish implications for gold.

There are not many changes on the silver chart - there was an interesting development, though. Silver moved higher and then reversed, almost instantly invalidating the breakout above the 20-day moving average. Fake breakouts are a bearish sign, especially for silver, so the situation didn’t improve for the white metal. Please note that in all cases since early June when silver moved temporarily to or above the 20-day moving average, local tops were formed.

From the long-term perspective, Monday’s reversal didn’t change anything. Both: XAU and HUI are well below their 2008 lows and the breakdown was clearly not invalidated. The odds are that the decline will continue, although we can’t rule out a correction back to the previously-broken 2008 lows.

The short-term GDX ETF chart features a daily reversal, which could (!) translate into higher prices in the short term. Could, but that’s not very likely. The reason is that the volume on which miners reversed was relatively low – without confirmation from volume, reversal patterns (hammer candlestick in this case) are not really reliable. Consequently, yesterday’s move doesn’t have meaningful implications.

Summing up, the situation in the precious metals market remains bearish. We could see a rally based on the miners’ reversal, but it’s not very likely and the size of the move is not likely to be significant. The move (if it materialized) would not likely take mining stocks back above their 2008 lows. Consequently, we think that keeping our short positions intact (even in light of the possibility of a small rally) is justified from the risk/reward point of view. The risk of missing on the decline’s continuation seems more important at this time. We will keep you – our subscribers – updated.

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 (!) target prices:

• Gold: initial target price: $1,062; stop-loss: $1,208, initial target price for the DGLD ETN: $95.88; stop loss for the DGLD ETN $66.49
• Silver: initial target price: $12.72; stop-loss: $17.11, initial target price for the DSLV ETN: $102.21; stop loss for DSLV ETN $38.32
• Mining stocks (price levels for the GDX ETN): initial target price: $14.12; stop-loss: $18.73, initial target price for the DUST ETN: $30.68; stop loss for the DUST ETN $14.08

In case one wants to bet on lower junior mining stocks' prices (we do not suggest doing so – we think senior mining stocks are more predictable in case of short-term trades – we 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: $18.12; stop-loss: $25.78
• JDST: initial target price: $16.26; stop-loss: $5.79

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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