Briefly: In our opinion speculative short positions (full) are currently justified from the risk/reward point of view.
The Fed didn’t increase interest rates yesterday and it stated that there would not be as many rate hikes this year as they had predicted previously. What is gold likely to do in this environment?
Overall not much changed, as this was what the market had already expected. The Fed “reported” what the market was already widely expecting, so we didn’t learn much from the statement. At face value, the information is bullish, but in light of the expectations, it was neutral.
Let’s take a closer look at what happened yesterday (charts courtesy of http://stockcharts.com).
Gold moved $6 higher (not much given the “news” from the Fed) and once again the volume was not huge. Gold moved above the March high, but there was no breakout above the May high – at least not until today. We even saw a small sell signal from the daily Stochastic indicator and a move very close to the 70 level in the RSI indicator. Overall the situation didn’t really improve yesterday.
Today, however, we saw a move higher – above the May highs, which could trigger additional moves higher, if the breakout is confirmed. At the moment of writing these words, gold moved back to $1,303, so there was no clear breakout so far. Why did gold move higher at all? It’s always a difficult (and practically impossible in most cases) to say why a given move took place, but today it seems that it’s the reaction of the European markets to yesterday’s news from the Fed. If this is the case, we don’t need to see any other bullish consequences, as the announcement didn’t change anything.
From the long-term perspective, we don’t see a bigger change either. The most recent upswing in gold was accompanied by low volume, which suggests that it was a counter-trend move. This chart also tells us that if gold confirms the breakout above the previous 2016 highs, it is still not likely to rally far – the 2014 highs and the 38.2% Fibonacci retracement provide resistance.
Gold seen from the non-USD perspective also moved higher and it once again moved to levels that (approximately) triggered declines 4 times in the past 1.5 years. Additionally, this is the third rally in the consolidation and back in 2015 the third rally during the consolidation was the final one – the big decline followed thereafter.
The situation in silver didn’t change much, so let’s move to mining stocks.
There was once again a small breakout above the May high in the case of the GDX ETF, but this was not the case with the HUI Index. Consequently, we don’t view the breakout as being “in”. Overall, gold made a new short-term high, but miners didn’t and that continues to have bearish implications for the precious metals sector.
Summing up, the outlook for the precious metals market didn’t really change as yesterday’s announcement from the Fed was in tune with what the market had already expected. Today’s pre-market move could become something more than just a short-lived post-announcement reaction, but at this time it isn’t as the breakout above the previous high is already invalidated. We are moving the stop-loss for gold a bit higher due to the increase in the price and the lack of a breakout in mining stocks (it would take a bigger price move to change the risk/reward ratio than a move to $1,317 on an intra-day basis).
As always, we will keep you – our subscribers – updated.
To summarize:
Trading capital (our opinion): Short positions (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:
- Gold: initial target price: $1,006; stop-loss: $1,323, initial target price for the DGLD ETN: $86.30; stop-loss for the DGLD ETN $44.35
- Silver: initial target price: $12.13; stop-loss: $18.17, initial target price for the DSLV ETN: $65.88; stop-loss for the DSLV ETN $24.16
- Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $27.47, initial target price for the DUST ETF: $47.90; stop-loss for the DUST ETF $8.50
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: $41.73
- JDST ETF: initial target price: $61.74; stop-loss: $9.87
Long-term capital (our opinion): No positions
Insurance capital (our opinion): Full position
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 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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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager
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