Briefly: In our opinion, full (150% of the regular full position) speculative short positions in gold, silver and mining stocks are justified from the risk/reward perspective at the moment of publishing this alert.
In yesterday’s alert we wrote that the strength in the mining stocks relative to metals made it somewhat likely that we would see a turnaround in the entire precious metals sector and we discussed when that could happen and what the trigger could be. However, based on yet another day when metals didn’t do much and miners rallied, it could be the case that the scenario discussed yesterday will be replaced by a different one.
Namely, it could be the case that mining stocks will be the only part of the precious metals market in which the correction will be seen at all and that metals will not do much more than just trade sideways for some time, after which the downward trend will continue.
Let’s take a look at the GDX-to-GLD ratio for details (charts courtesy of http://stockcharts.com).
The above chart shows that the mining stocks to gold ratio rallied sharply in the past few days as a result of significant outperformance of miners and it also shows that the declining resistance line (based on two major 2017 highs) is just around the corner. In fact, only a repeat of yesterday’s outperformance would bring the ratio to a level that would indicate a local top.
The same goes for the chart featuring gold stocks – only a few additional index points are required for the HUI Index to move to the combination of multiple resistance levels: strong resistance lines (breakdowns below them have been confirmed), the 50-day moving average and the 50% Fibonacci retracement level that coincide at about 200. Consequently, it could be the case that the rally is halfway done.
So, if miners are likely to top shortly and the miners to gold ratio is likely to top shortly as well, then we may have a situation when a rally in gold and silver does not materialize at all – at least not yet.
The corrective upswing could still be seen if the USD Index corrects, but as far as the current move higher in miners is concerned, it appears that its impact on the prices of metals may be very limited and the entire rally could be close to its end.
In yesterday’s alert, we wrote that if we got bullish confirmations, the short-term outlook for the precious metals sector could change, but so far we haven’t seen any, so it doesn’t seem that a change in the outlook is warranted, especially that the size of the upswing in miners is likely to remain limited.
Summing up, the outlook for the price of gold in May is still bearish in general, but – based on the strength in the mining stocks and the proximity of support levels in gold and silver – it could temporarily (!) change in the following days. Whether the short-term outlook changes or not will depend on the signals and confirmations that we get once metals move lower. We’re keeping our eyes open, but at this time it seems unlikely that the outlook will indeed change as it appears that the corrective upswing is really visible only in mining stocks (and proximity of resistance lines in gold stocks and their ratio to gold suggests that the rally is close to being over). As always, we will keep you – our subscribers – informed.
To summarize:
Trading capital (supplementary part of the portfolio; our opinion): Short positions (150% of the full position) in gold, silver and mining stocks are justified from the risk/reward perspective with the following stop-loss orders and initial target price levels / profit-take orders:
- Gold: exit-profit-take level: $1,063; stop-loss: $1,317; initial target price for the DGLD ETN: $81.88; stop-loss for the DGLD ETN $44.57
- Silver: initial target price: $13.12; stop-loss: $19.22; initial target price for the DSLV ETN: $46.18; stop-loss for the DSLV ETN $17.93
- Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $26.34; initial target price for the DUST ETF: $143.56; stop-loss for the DUST ETF $21.37
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: $14.13; stop-loss: $45.31
- JDST ETF: initial target price: $417.04; stop-loss: $43.12
Long-term capital (core part of the portfolio; our opinion): No positions (in other words: cash)
Insurance capital (core part of the portfolio; our opinion): Full position
Please note that the in the trading section we describe the situation for the day that the alert is posted. In other words, it we are writing about a speculative position, it means that it is up-to-date on the day it was posted. We are also featuring the initial target prices, so that you can decide whether keeping a position on a given day is something that is in tune with your approach (some moves are too small for medium-term traders and some might appear too big for day-traders).
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 signs 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, Gold & Silver Fund Manager
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