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

Gold moved higher yesterday, which might seem encouraging until one compares it to the performance of mining stocks. Miners declined quite visibly yesterday and since the previous major declines were preceded by this type of action, the question is if we can expect another major downswing in the coming days.

In short, that’s probably the case, but the situation is not extremely bearish. Let’s take a closer look (charts courtesy of http://stockcharts.com).

Gold once again moved higher after confirming the breakdown below the rising support line and once again the volume during the upswing was relatively low. This is the kind of action that we expect to see during corrective upswings within declines, so the implications are bearish.

Silver moved only 2 cents higher, so nothing has really changed since yesterday. Silver didn’t rally above even the first of the classic Fibonacci retracement levels, so technically, the recent move higher is simply a correction and we should expect another decline to follow shortly.

Mining stocks declined yesterday and the size of the move was quite significant – miners declined by more than 3%. Gold moved higher by $5, so this kind of decline stands out as something important and bearish.

However, the general stock market declined once again, so miners had a good reason to decline and thus, the mentioned underperformance is not something as extremely bearish as it seems at the first sight. It’s bearish, but only somewhat so.

The size of the volume was not low (which could have been viewed as a bullish sign), but it was not high either (which could have been viewed as a bearish sign), so we can’t draw meaningful implications from it.

All in all, the situation in the mining stocks and their underperformance made the short-term picture a bit more bearish.

Is there a good reason for the recent action to be only a temporary move higher (in gold and silver)?

There is. We just saw a move back to the previously broken support/resistance lines in the case of the USD Index. More interestingly, the decline took place right at the cyclical turning point, which makes the short-term picture bullish, despite the immediate-term decline. In light of the above, the trend for the USD Index remains up and the trend for the precious metals market remains down.

Overall, little changed in the precious metals market (and the signal from the gold market served as a bearish confirmation) and we can summarize today’s alert in the same way as we summarized yesterday’s issue:

Summing up, the situation and outlook didn’t change based on yesterday’s price move and the outlook remains bearish.

The analogy to the similar session (Oct. 15, 2014), gold’s underperformance relative to the USD Index, and other technical signs make us think (our opinion) that much lower prices are in the cards and that the short positions will become much more profitable than they already are (despite natural corrections along the way).

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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