Briefly: In our opinion, short (half) speculative positions in gold, silver and mining stocks are justified from the risk/reward point of view.
Mining stocks have disappointed many investors once again (those that were expecting to see strength in the sector), but not us - we were not disappointed as we saw our profits grow once again. Gold and silver declined as well, but the miners’ slide was much more visible and much more meaningful.
Before discussing the situation in mining stocks in greater detail, let’s take a look at the metals, starting with gold (charts courtesy of http://stockcharts.com).
Gold didn’t slide below the previous intra-day lows yesterday, but it closed below the previous close. In fact, it was the lowest daily close since the second half of March. The implications of this breakdown are bearish but not extremely bearish.
Our yesterday’s comments on the above chart remain up-to-date:
Please note that there were only a few cases in the previous months when gold closed below $1,170. When that happened, it moved to $1,140 quite quickly. Consequently, we will not be surprised to see gold trading in tune with this pattern once again in the coming days.
The situation in the silver market didn’t change – it’s been bearish and it still is. Yesterday’s decline is another step toward our target areas.
While we haven’t seen anything new in the silver market, we’ve seen another major development in mining stocks. Both the XAU and HUI indices moved lower once again and that happened after the breakdown below their respective 2008 lows. The breakdowns are almost confirmed at this time.
As you can see, both breakdowns are visible, even from the very long-term perspective. It seems quite likely that the breakdown will be confirmed as mining stocks are already well behind the initial bounce (it took place in late 2014). When it does, the outlook will deteriorate significantly and we will very likely double the size of the current short position – but this is not the case just yet.
Since the situation in the precious metals market is developing in tune with our expectations (just as the situation in crude oil), our yesterday’s summary remains up-to-date also today:
Summing up, the situation in the precious metals market remains bearish and based on this week’s disappointing performance of precious metals and very weak performance of mining stocks (and the breakdown below the critical support), it deteriorated further. It’s not extremely bearish just yet as we haven’t seen a confirmed breakdown in the HUI and XAU indices below their 2008 lows, so we don’t think that doubling the size of our profitable short position is justified just yet. We’re very close to this moment, though. It will take only an additional daily close below the 2008 lows for the breakdowns to be confirmed and for the situation to become extremely bearish. We will keep you – our subscribers – updated.
We will keep you – our subscribers – updated.
To summarize:
Trading capital (our opinion): Short position (half) 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: $1,115; stop-loss: $1,253, initial target price for the DGLD ETN: $87.00; stop loss for the DGLD ETN $63.78
- Silver: initial target price: $15.10; stop-loss: $17.33, initial target price for the DSLV ETN: $67.81; stop loss for DSLV ETN $41.17
- Mining stocks (price levels for the GDX ETN): initial target price: $16.63; stop-loss: $21.83, initial target price for the DUST ETN: $23.59; stop loss for the DUST ETN $10.37
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: $21.17; stop-loss: $28.68
- JDST: initial target price: $14.35; stop-loss: $5.65
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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