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.
The gold stocks to gold ratio reached an important resistance line on Friday and it appears that it could have been the local top. What does the above imply for the following days and weeks?
In our previous alert, we wrote the following:
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.
Furthermore, we commented on the below chart (charts courtesy of http://stockcharts.com) in the following way:
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.
That’s exactly what happened – mining stocks moved higher while gold’s price increased just a bit, which caused the ratio to move higher once again, this time to the declining resistance line. This is something that is likely to indicate a local top in the outperformance of miners.
The same goes for gold stocks as well, based on their own chart.
In Friday’s alert, we wrote the following:
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 miners indeed moved to the mentioned combination of resistance levels and this suggests that the rally could stop here.
The price moves in metals were very small compared to what we saw in mining stocks.
Please note that both small upswings took place on relatively low and declining volume – this suggests that the move was a counter-trend pause and not a beginning of a new uptrend.
Moreover, since the USD Index declined by about 0.4 on Friday, one might have expected gold and silver to move higher in a more profound way – but they didn’t. The lack of performance given a bullish development is just as bearish as the miners’ outperformance relative to gold is. The latter, however, moved to a resistance line that points to a reversal and metals didn’t.
As far as today’s pre-market price performance is concerned i.e. the rally that’s visible in particular in silver, please keep in mind that silver’s short-term outperformance relative to gold is usually a sign that the rally is ending – this could mean that a reversal is upon us. Besides, silver moved to and reversed upon reaching its March lows, so the rally could have been nothing more than a verification of the breakdown below it. All in all, today’s pre-market upswing doesn’t seem to change much, if anything.
Before summarizing, let’s remind ourselves about the factor that makes it likely that the big slide will take place relatively soon and that sticking to the short position makes more sense than trying to time the small corrective upswings.
The above long-term silver chart features silver’s long-term turning points. In general, every 2 years (precisely, a little less than 2 years), a major development in the silver market takes place. In the past 4 cases, we saw important bottoms and the odds are that this time will not be different, especially that virtually all cases when this trend was seen were accompanied by a major extreme (including the 2006 and 2008 highs).
Now, if we are to see a major bottom in the final months of this year then it doesn’t give too much time for the big decline to materialize and thus it’s quite likely that its already underway. Furthermore, for the big bottom to take place later this year, silver (and the rest of the precious metals sector) needs to decline at a quite significant pace and thus timing the corrective upswing and aiming to re-enter short positions at higher prices might be very hard to do. Consequently, unless there are multiple signs pointing to higher prices in the short term, it doesn’t seem that closing the short positions will be justified.
Summing up, the outlook for the precious metals market remains bearish. Based on the levels achieved by the mining stocks to gold ratio and gold stocks themselves it appears that the corrective rally in miners is over or 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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