Briefly: In our opinion speculative short positions (half) in gold, silver, and mining stocks are justified from the risk/reward perspective.
The history repeats itself once again – gold just attempted to move higher but failed to ignite anything more than a small daily rally. Let’s see if there’s anything that this can tell us (charts courtesy of http://stockcharts.com.)
There’s one clue. It’s not a very strong one, but at least we have something new to comment on. The last 2 sessions were very similar to what we had seen at the beginning of the month. Back then gold declined quite visibly, so perhaps the same reaction will be seen also this time. In this case, such a decline would have more bearish consequences, as it would take gold below the previous lows and such a breakdown would likely lead to further declines.
Other than that, there’s not much that we can say about the changes in the gold market itself. What we wrote about gold in the previous alert remains up-to-date:
We wrote that the strength that we could see here would likely be temporary. It turned out that the rally that this reversal generated was indeed very small and temporary. We saw another lower intra-day high in gold, and the move higher materialized on low volume. We’re once again seeing this bearish combination. If the USD Index confirms its breakout, gold might finally break below the short-term support.
How far can it go initially? Our best guess at this particular moment (this might change as the situation develops) is the $1,200 level or close to it. One of the ways to estimate the size of a given move is to assume that the move following the consolidation (which we’ve been seeing since the beginning of April) will be similar to the one preceding it. In this case, the move following the breakdown could be similar to the March decline, and such a move would take gold close to the $1,200 level. This level is very close to the 2013 lows, so we expect gold to pause there (but not to end the decline).
There is not much to comment on in case of silver and mining stocks but the situation in the USD Index has changed more visibly.
The U.S. dollar moved higher once again and almost confirmed the breakout above the declining resistance line. Precious metals are not reacting yet. Unless metals start to react to the dollar’s strength (by declining) we will view this as a sign of their strength. For now we still think that the reaction is delayed – not really absent.
One of the reasons for the lack of reaction could be the situation in the silver market.
Silver is right at its support line. In addition to the 2013 lows this is the key support level that prevents silver from moving much lower – to the $14 - $16 target area. Once this level is broken, silver may and likely will move sharply lower. Being this significant, it’s no wonder that this support line is not easy to break. Since gold, silver, and mining stocks are highly correlated in the short term, it’s also no wonder that silver’s refusal to move lower already is accompanied by a similar refusal in the case of gold and mining stocks.
Summing up, the outlook for gold, silver, and mining stocks remains bearish, but not extremely bearish, which means that we are not increasing the size of the short position just yet. Precious metals are not responding strongly to the dollar’s rallies so far, but it seems that investors and traders are simply waiting for a confirmation of the breakout in the USD Index (there have been cases when the metals’ reaction was delayed in the past).
To summarize:
Trading capital (our opinion): Short positions (half) in: gold, silver, and mining stocks with the following stop-loss orders:
- Gold: $1,326
- Silver: $20.30
- GDX ETF: $25.20
Long-term capital: No positions.
Insurance capital: Full position.
Please note that a full speculative position doesn’t mean using all of the speculative capital for this trade. You will find details on our thoughts on gold portfolio structuring in the Key Insights section on our website.
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 automated tools (SP Indicators and the upcoming self-similarity-based tool).
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.
Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief
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