Briefly: In our opinion, speculative short positions (full) in gold and mining stocks are justified from the risk/reward point of view.
During yesterday’s session (actually, mostly in the pre-market trading) the precious metals market – especially silver – moved higher as the USD Index moved lower. Will the rally continue?
Let’s jump right into the charts (charts courtesy of http://stockcharts.com).
Nothing changed on the long-term gold chart – gold remains within the declining trend channel and the outlook remains bearish.
From the non-USD perspective, nothing really changed either. Gold moved just a little higher and it still appears to be declining after the invalidation of the small breakout above the 2015 high.
From the short-term point of view, not much changed either. Gold moved to the 61.8% Fibonacci retracement level and declined after reaching it. There was no meaningful breakout. The only meaningful breakout was in…
Silver. However, as we wrote many times in the past, silver’s breakouts often turn into “fakeouts” and we’ve seen this way too many times to view this breakout as bullish even though it’s visible even from the long-term perspective. Since the line that silver broke is of a long-term nature, we can expect the initial move after the breakout to be also visible from this perspective. Consequently, it’s not really bullish.
Still, given the size of yesterday’s move up and the strength of the momentum, we don’t want to re-open the short position automatically, just in case silver moves even higher on a temporary basis.
What about gold stocks? Again, not much new – gold miners moved close to their recent high, without breaking above it. Moreover, the sell signal from the RSI indicator remains in place.
What was the likely reason behind the PM’s rally? The decline in the USD Index. The important thing is that despite this decline, the USD didn’t invalidate the previous breakout and that it didn’t move below the previous low. The outlook is still more bullish than it was about a week ago and the implications for the precious metals market continue to be bearish.
Summing up, Summing up, even though a lot happened yesterday, it doesn’t seem that a lot changed – at least not based on what we saw yesterday and what we are seeing so far today. Consequently, we think that a short position (full) in gold and mining stocks is justified from the risk to reward point of view. We will likely adjust this position (probably by re-entering a short position in silver) in the coming days.
As always, we will keep you – our subscribers – updated.
To summarize:
Trading capital (our opinion): Short positions (full) in gold 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: $973; stop-loss: $1,304, initial target price for the DGLD ETN: $89.05; stop-loss for the DGLD ETN $47.15
- Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $24.07, initial target price for the DUST ETF: $5.72; stop-loss for the DUST ETF $1.74
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: $36.37
- JDST ETF: initial target price: $8.86; stop-loss: $2.27
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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