Briefly: In our opinion, short (full) speculative positions in gold, silver and mining stocks are justified from the risk/reward point of view.
Gold and silver didn’t do much yesterday, but precious metals mining stocks moved visibly higher, invalidating the previous day’s breakdown – is the bottom in?
In short, it’s too early to say so. Miners indeed rallied, but they had a very good reason to do so in the form of a soaring stock market, so their own rally is not really a sign of strength of the precious metals sector.
Let’s take a look at the charts (charts courtesy of http://stockcharts.com).
Gold is more or less where it was on Tuesday and with another daily close below the key support levels, the breakdown is getting verified. Ideally, we would like to see a third close below the previous 2015 low as well – then the road to $1,050 or much lower will be fully open.
Silver closed exactly at its previous 2015 low. There was no breakdown but no reversal either. Consequently, the situation remains bearish – it didn’t deteriorate yesterday.
The thing that changed is the price of the GDX ETF – a proxy for mining stocks. It moved higher, which might be viewed as an early sign of strength of the precious metals sector, but we think this is not the case. It could be a bullish sign, but it could also be a natural way in which miners reacted to a significant move higher in the main stock indices. Consequently, the miner’s strength doesn’t necessarily have bullish implications for the precious metals market in the coming days and weeks.
Other than the above, there is little to comment on as overall not much changed yesterday.
Summing up, Summing up, gold closed below the previous 2015 low for the second consecutive day which has somewhat bearish implications and mining stocks moved higher likely based on a rally in the general stock market, which may be somewhat bullish, but it’s not clear. Consequently, we think that overall the outlook didn’t change based on yesterday’s developments and it remains bearish. We can’t rule out another corrective upswing in the coming days (based on what we saw yesterday, it seems that there’s an about 30% probability of seeing a corrective upswing shortly), but if we see it, it seems unlikely that gold would move above $1,100 or so.
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: $1,012; stop-loss: $1,103, initial target price for the DGLD ETN: $109.27; stop loss for the DGLD ETN $85.51
- Silver: initial target price: $12.60; stop-loss: $14.73, initial target price for the DSLV ETN: $96.67; stop loss for DSLV ETN $61.00
- Mining stocks (price levels for the GDX ETF): initial target price: $11.57; stop-loss: $14.23, initial target price for the DUST ETF: $26.61; stop loss for the DUST ETF $17.55
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: $16.27; stop-loss: $20.03
- JDST ETF: initial target price: $46.47; stop-loss: $29.71
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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