Gold & Silver Trading Alert: Precious Metals’ Bottom Targets

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Briefly: In our opinion, (150% of the full position) speculative short positions in gold, silver and mining stocks are justified from the risk/reward perspective. We are moving the stop-loss levels lower, so we are effectively locking-in profits while letting them grow at the same time.

Gold plunged, our profits soared and overall many inexperienced investors got wiped out of the market – the gold market should have rallied given Trump’s presidency, right? Things in capital markets are rarely so simple. It’s all a matter of what the market had been expecting and what happened to the price based on technical (emotional) reasons. What’s next? Let’s take a look at the charts (charts courtesy of http://stockcharts.com).

Short-term Gold price chart - Gold spot price

Gold plunged on Friday and the decline took place on significant volume. The implications are bearish. At this moment, it seems to be a good idea to quote what we wrote about gold’s downside targets several weeks ago:

Since gold broke below $1,300, the next support levels are provided by Fibonacci retracements based on the 2015 – 2016 rally. At $1,250 there is also the support in the form of the June bottom. The decline to this level is quite likely to be volatile, as there are no meaningful support levels between $1,300 and $1,250, so we could see a more visible corrective upswing after gold reaches $1,250, but that’s rather unclear at this time.

After moving below $1,250, gold is likely to slide to about $1,200 - the Fibonacci level there (it’s at $1,212) is close to the previous bottoms (March, May). Since there are 2 recent bottoms at this level (and they are also more prominent), this support is stronger and thus this level could generate a bigger bounce (perhaps even back to $1,250 or so), but it depends on many factors, including whether we will have a bigger bounce after gold reaches $1,250 first. If not, then the odds of a bigger bounce from $1,200 become much bigger.

Finally, the $1,172 level provides the weakest resistance as it is not accompanied by a confirmation from previous bottoms. Consequently, this level is least likely to generate a sizable rally, but we would like to emphasize that this is based on the data that we have today – the odds can change.

Gold indeed started a bigger corrective upswing after reaching the first Fibonacci retracement level and this makes a sizable rebound from about $1,200 rather unlikely. It now seems much more likely that gold will pierce through this level and slide all the way down to the 61.8% Fibonacci retracement at about $1,172. Gold could bounce after reaching it, but it’s not certain that it will. If we see bullish confirmations with gold at this level (or close to it), the outlook could change, but it’s too early to say so now.

Long-term Gold price chart - Gold spot price

The MACD and PMO indicators have also flashed sell signals just like it was the case in early 2013, further confirming the analogy between these 2 periods. The implications are bearish as back in 2013 similar signals were generated right before the big decline.

Long-term Silver price chart - Silver spot price

Silver took a dive as well and the decline is already visible from the long-term perspective. The RSI indicator moved below the 50 level, just like it was the case in early 2013. The analogy to this year remains in place and it appears that the final big decline of 2016 is already underway. Back in 2013 there was a small stop before silver truly plunged, which may happen also this time. If it does, then it’s likely to be seen close to the $16 level.

Back in 2013, the small corrective upswing started after silver reached the line based on the previous local bottoms and it could be the case that this happens again.

Short-term Silver price chart - Silver spot price

The support provided in the mentioned way is currently at about $16, within our target area – in its lower part. Since it coincides with the June bottom, it’s even more likely that we will see a rebound from the $15.80 - $16 range.

The rebound is not likely to be significant, so whether we choose to limit or close the short position and take profits off the table at that time is not clear yet. The correction was small back in 2013 and it might be difficult to get back in at better prices, so the action that we will take will depend on the bullish confirmations that we might get when silver is close to these levels.

HUI Index chart - Gold Bugs, Mining stocks

Gold stocks declined more than 17% last week and completed the bearish head-and-shoulders pattern. The breakdown below the line based on weekly closing prices is clearly visible, so the implications are very bearish. The target based on the pattern (assuming the move after the breakdown will be similar to the size of the head) is slightly below 140, but another strong support is provided by the 2008 and 2014 lows (at approximately 150), so it seems quite possible that this area (140-150) will generate a corrective upswing, but it’s not likely that this will be the end of the entire decline.

Summing up, it appears that the big decline in the precious metals sector has resumed and that much lower prices are ahead for gold, silver and mining stocks. No market moves in a straight line up or down, so there will be corrective upswings along the way, but it doesn’t seem that metals and miners would rally without an additional significant decline first. The decision to increase the size of the positions was a very profitable one as we did so right before the biggest slide. Still, it seems that the profits on the short position will increase further before the trade is over.

We are moving the stop-loss levels lower, so we are effectively locking in the gains, while allowing them to grow.

As always, we will keep you – our subscribers – updated.

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 entry prices, stop-loss orders and initial target price levels:

Gold: initial target price: $1,006; stop-loss: $1,272, initial target price for the DGLD ETN: $73.19; stop-loss for the DGLD ETN $47.51
Silver: initial target price: $13.12; stop-loss: $18.13, initial target price for the DSLV ETN: $39.78; stop-loss for the DSLV ETN $22.81
Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $23.12, initial target price for the DUST ETF: $297; stop-loss for the DUST ETF $38.52

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: $38.23
JDST ETF: initial target price: $245; stop-loss: $26.58

Long-term capital (core part of the portfolio; our opinion): No positions

Insurance capital (core part of the portfolio; 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 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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