Briefly: In our opinion (full) speculative long positions in gold, silver and mining stocks are currently justified from the risk/reward perspective. Getting back on the long side of the precious metals market with half of the long-term investment capital seems justified from the risk/reward perspective.
Today’s alert is going to be a little different than what we posted in the past 2 days, because the situation didn’t change at all yesterday. Basically all charts that we featured yesterday and on Wednesday are up-to-date today, so there’s little point in providing them all over again and quoting all the descriptions. If you have not read yesterday’s or Wednesday’s alerts, we strongly suggest that you do so today.
In short, the precious metals sector moved only a little lower yesterday and the moves were accompanied by relatively low volume (the moves lower weren’t even significant enough to erase Tuesday’s rally) while the USD Index moved higher. At the moment of writing these words the USD Index is at 92.14, so any temporary moves above the long-term resistance lines were invalidated. Gold, silver and mining stocks seem to have paused the rally, not ended it, and the USD Index is likely to decline in our view sooner rather than later.
Before quoting yesterday’s summary (which remains up-to-date), we would like to discuss one thing regarding mining stocks. The share prices of all companies depend to a great extent on the company’s profits, both current and potential. Profits mean revenue minus costs. In the case of gold mining companies, the largest factor on which profits depend is the price of gold. Consequently, it’s no wonder that gold stocks’ prices depend to a large extend on the price of gold and they both move closely. However, let’s not forget about the miners’ costs. There are multiple costs that one needs to take into account, but ultimately a large part of these costs will depend directly or indirectly on the price of crude oil. Why? It impacts directly the cost of transport and indirectly many other costs. This means that higher crude oil prices mean higher costs. In the recent months we’ve been seeing a major decline in the prices of crude oil, which means that costs and perhaps the expectation of further costs have been greatly lowered for many companies, including mining stocks. This means that perhaps the outperformance of mining stocks will stay for much longer than for just several days - say for a few years (like from 2001 to 2006), until costs are back up. The above doesn’t have to be the case - there are other factors that need to be considered as well, but oil’s big decline gives us a good reason to expect this to actually happen.
Summing up, gold’s and mining stocks’ strength (another day proving it) combined with the likelihood of a relatively big corrective downswing in the USD Index made the situation more bullish not only from the short-term perspective, but also from the medium-term one. The trends in gold, silver and mining stocks remain down, so we are likely to see even lower values of precious metals and mining stocks. However, the odds that this will not be the case have increased. Does the risk/reward ratio still favor staying completely out of the precious metals market with the long-term investment capital? While it’s tempting to aim for buying back exactly at the bottom or extremely close to it, the prudent answer to this questions is “no”. The odds that this rally will become something bigger than just a corrective upswing are too high at this time (we subjectively guesstimate these odds at about 40%). Not everything is in place, but enough happened (or is about to happen, like the likely top in the USD Index) to [be] in with half of the long-term investment capital.
To summarize:
Trading capital (our opinion):
It seems that having speculative (full) long positions in gold, silver and mining stocks is a good idea:
- Gold: initial target level: $1,277; stop-loss: $1,179, initial target level for the UGLD ETN: $ 14.00; stop loss for the UGLD ETN $11.10
- Silver: initial target level: $17.46 ; stop-loss: $15.44, initial target level for the USLV ETN: $25.69 ; stop loss for USLV ETN $17.91
- Mining stocks (price levels for the GDX ETN): initial target level: $21.46 ; stop-loss: $18.38 , initial target level for the NUGT ETN: $17.14 ; stop loss for the NUGT ETN $10.93
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 level: $28.96 ; stop-loss: $23.87
- JNUG: initial target level: $42.46 ; stop-loss: $23.84
Long-term capital (our opinion): Half positions in gold, half positions in silver, half position in platinum and half position in mining stocks.
We continue to favor senior mining stocks over junior mining stocks, but this will likely change relatively soon as the SP Junior Long Term Indicator is already below the lower of the signal lines and as soon as it turns back up, we will see a “move from seniors to juniors” signal. As far as senior gold stocks and silver stocks selection is concerned for speculative and long-term investment purposes, we continue to view our tools: Golden StockPicker and Silver StockPicker as the optimal way of choosing them.
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 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.
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Hand-picked precious-metals-related links:
Deutsche Bank: Gold Still Not Cheap
Centamin stock dives on below-expectations 2015 gold output forecast
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In other news:
Sturdy U.S. employment gains eyed; jobless rate seen at 5.7 percent
Are Bonds A Better January Barometer For Stocks?
Greek debt held by ECB cannot be restructured: ECB's Coeure
The $100 Trillion Reason Why Central Banks Are Terrified of Debt Deflation
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Oil Investment Update: The Epic Decline and Its Implications
In Dec crude oil lost over 18% as ongoing expectations of growing supplies and concerns over the pace of global growth weighed on the price. As a result, the commodity dropped below the 61.8% Fibonacci retracement (around $65 per barrel), which accelerated declines and took light crude to the support zone created by the 76.4% and 78.6% Fibonacci retracement levels (based on the entire 2009-2011 rally). Unfortunately for oil bulls the beginning of the year brought a breakdown under these levels, which resulted in a drop to the next support area created by the Apr 2009 lows. Will we see a rebound from here? Or maybe this is another pause before new lows?
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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief
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