Gold & Silver Trading Alert: No Real Strength in Miners So Far

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

In short, not much changed in the precious metals sector yesterday. The only thing that we can comment on today is the low volume that we saw in the GDX ETF and the precious metals sector’s pause given the USD’s rally.

Regarding the latter, the fact that gold didn’t decline despite the USD’s rally is a bullish sign for gold, but for now, only a weak one, as we saw this type of performance for only one day and we are right before the release of the comments from the Fed. Consequently, the USD’s reaction could have been rumor-based or caused by a random pre-announcement trigger. In other words, the gold-USD link could be working only partially at this time and unless we see more days when gold is able to hold ground despite the rallying USD, there’s not much that we will be able to say based on it.

It could be the case that the USD keeps rallying and gold starts to respond (as yesterday’s move higher could have been viewed by traders as an expected correction and it will be the continuation of the strength that will make them believe that the USD is indeed about to move even higher).

Regarding the former, let’s take a look at the chart (charts courtesy of http://stockcharts.com).

GDX - Market Vectors Gold Miners - Gold mining stocks

The volume on which miners traded yesterday was once again tiny. These kind of sessions usually preceded declines, quite often very significant ones. This signal didn’t result in lower prices earlier this month, but once is not enough to invalidate a tendency, and we think the same is the case here – the implications are still bearish.

Other than that, there’s not much new that we can comment on in today’s alert. Silver’s outperformance relative to gold is a bearish sign – the RSI indicator based on the silver to gold ratio is above 70, which is what we saw at previous important tops. The HUI Index remains well below the declining long-term resistance line and so does gold.

Overall, since not much changed yesterday, we can summarize today’s alert in a similar way to what we wrote yesterday:

Summing up, quite a lot seems to have happened last week, but actually not much really changed. There were no changes in the long-term pictures although the day-to-day price action seems to have been significant. The small breakout in silver is not something to be concerned with as it was not confirmed by breakouts in gold and mining stocks. Besides, silver is right at its turning point, so it’s likely to reverse shortly. Gold could move higher on a very short-term basis just as the USD Index could decline, but that’s not a sure bet – it’s much more certain (in our view) that the next major downswing will be to the downside, so that’s the move that we think it’s worth focusing on, not the day-to-day price swings.

Please note that just because the price of something is moving higher, it doesn’t mean that outlook for it is improving. If that was the case, the most bullish case for gold would have been in early September 2011 as that’s when gold was after a huge run-up – but it wasn’t a good time to be long – the opposite was much more profitable at that time.

We will keep you – our subscribers – updated.

To summarize:

Trading capital (our opinion): Short (full position) 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: $18.13, initial target price for the DSLV ETN: $67.81; stop loss for DSLV ETN $38.44
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, 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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