Gold & Silver Trading Alert: More Than Just a Small Rally?

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

The precious metals sector ended the previous week with a bang. Silver soared and the GDX broke above its declining resistance line. Is it time to get back into the precious metals market?

In our opinion – no. Quite a lot happened on Friday, but overall little changed. Let’s examine the charts and see what changed, what didn’t, and what implications it all has (charts courtesy of http://stockcharts.com).

Let’s start with the long-term charts.

Long-term Gold price chart - Gold spot price

Gold declined $7.90 last week. Most of the initial decline was corrected, but still, gold closed the week $7.90 lower than it had on the previous Friday. The decline continues and the medium-term downtrend remains in place.

Long-term Silver price chart - Silver spot price

Silver moved higher last week by 14 cents – little changed as far as the price alone is concerned. Nothing changed with regard to the main medium-term trend – silver remains below the declining red resistance line and the 50-week moving average. The declining red resistance line’s proximity suggests that the room for further rally is very limited – it seems likely that silver will decline relatively soon. However, if it doesn’t and it moves above the red line, then this will not automatically make the picture bullish. Earlier this year silver moved above this line very temporarily, after which it topped at the 50-week moving average and then started a major decline. That’s the kind of decline we are prepared to profit on in the current short position.

HUI Index chart - Gold Bugs, Mining stocks

The decline in gold stocks simply continues. Gold miners are trading around the support level created by the 2003 low. Since such a support was reached, it’s no wonder that the decline paused. The trend, however, is down, so we are likely to see lower prices sooner or later. The important thing is that even though mining stocks are already undervalued, they could – and are likely to – become much more undervalued at the final bottom. Our target areas for the coming decline are much below the level at which HUI Index closed on Friday.

What about the gold stocks’ performance relative to gold?

HUI:GOLD - Gold stocks to gold ratio chart

The situation is quite similar to what we see in the HUI Index ratio. The ratio broke well below its 2000 low and plunged much lower. However, no market or ratio can decline or rally without periodic corrections. Consequently, a pause here is not surprising, but something natural. The trend remains down.

All in all, nothing changed from the long-term perspective and it continues to be likely that the next really big move is going to be to the downside.

Let’s zoom in.

Short-term Gold price chart - Gold spot price

Gold moved higher on Friday, but the rally didn’t take gold above (or even to) the medium-term declining resistance line, so the trend remains clearly down. In fact, Friday’s rally was not even significant enough to generate a buy signal from the Stochastic indicator. Nothing really changed on the above chart and while the outlook is rather unclear for the next few days, it remains very bearish for the following weeks.

GDX - Market Vectors Gold Miners - Gold mining stocks

The GDX ETF closed a bit above the declining resistance line, which seems to be a very bullish event. The breakout is not confirmed (2 additional daily closes above the resistance line would be required), so it doesn’t have significant bullish implications just yet.

Please note that the GDX is not the only proxy for precious metals mining stocks.

HUI Index chart - Gold Bugs, Mining stocks

In case of the HUI Index, there was no breakout above the analogous line. Consequently, the breakout in the GDX is not really important – at least not yet.

HUI:GOLD - Gold stocks to gold ratio chart

On a relative basis, the mining stocks’ performance also didn’t change anything. The HUI to gold ratio doesn’t appear bullish even from a short-term perspective. The declining resistance line was not reached, let alone broken. Consequently, the mining stocks’ temporary strength vs. gold seems to be nothing more than that – a temporary phenomenon that will likely be reversed if not shortly, then soon.

Was there a good reason for silver and mining stocks to rally – one outside of the precious metals realm? Yes – the general stock market rallied (by the way, Paul entered long positions on Sep. 29). Silver tends to move in tune with stocks at times due to its multiple industrial uses and mining stocks are… well, stocks and also tend to move in tune with the general stock market at times. Consequently, the mining stocks’ rally is not necessarily bullish – it doesn’t show or prove the strength of the precious metals sector.

Short-term US Dollar price chart - USD

There was also a very good reason for the precious metals sector to rally in the form of the initial (early in the session) decline in the USD Index. The index plunged and investors seem to have overreacted assuming that the decline would continue. The opposite happened – the USD Index reversed and its outlook actually improved based on this action. The reason is the cyclical turning point – the USD Index declined and reversed exactly at it. With this action behind us, it seems that the rally in the USD Index can continue. This is likely to have a negative impact on the precious metals sector. As you may recall, precious metals market tends to react particularly well to the USD’s breakouts. Consequently, once the USD rallies above the previous highs, the impact on the precious metals sector is likely to intensify.

Summing up, even though it seems that a lot happened and changed on Friday, we think that there were barely any changes. The outlook for the next several days is rather unclear, but it remains bearish for the medium term. We realize that it’s not particularly enjoyable to watch the markets trade sideways for weeks (we took profits on the long positions and entered short ones on Aug. 24), but the reasons for which we opened this position remain up-to-date and it continues to be likely that the next big downswing will prove very profitable. In other words, it seems likely that our patience with this trade will be well rewarded, if not shortly then in the following weeks.

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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