Briefly: In our opinion, speculative short positions (150% of the full position) in gold and silver and regular (100% of the full position) short position in mining stocks are justified from the risk/reward point of view.
There was a lot of talk about gold and silver “regaining ground” and “building momentum” based on just Wednesday’s rally and it was all invalidated based on what happened yesterday. Gold and silver declined and closed at new monthly lows. What are the implications?
The implications are that the outlook is just as bearish as it was previously – gold’s and silver’s only reaction to positive fundamental news is a very brief move higher that is followed by bigger declines. This shows that the trend is now clearly down and we’ll see a bigger decline rather sooner than later.
Let’s take a closer look (charts courtesy of http://stockcharts.com).
In our yesterday’s alert, we wrote the following:
The lowest close of April is at 93.94 and we marked this with a blue line on the above chart. The USD Index closed only a little below this level, so this move is not confirmed. Since the USD is already back above this level now, the breakdown was already invalidated in intra-day terms and the odds are that it will also be invalidated in terms of daily closing prices. Consequently, what appeared as bearish yesterday, really isn’t.
Please note that the cyclical turning point for the USD Index is just around the corner, which means that the fact that we saw a decline yesterday can actually be positive – it could be the case that the turnaround that was likely to happen is already behind us – without it we would have a big risk of a more significant turnaround in the near future.
We can say the opposite about the implications for the precious metals market.
The above remains up-to-date as the USD Index closed the day at 94.13 – well above the mid-April low. The opinion about breakout being invalidated turned out to be incorrect and the bullish case prevailed – at least for now. Naturally, the outlook remains bullish for the USD Index.
We would like to draw your attention to the fact that even though USD rallied, it didn’t close above the previous May high. Gold and silver, however, did, which is a sign bearish sign for the precious metals sector.
As we wrote above, gold closed a bit below the previous May low, which is a bearish sign. The previous breakdown below the March high was invalidated, but it wasn’t followed by a rally – we just saw another slide. The important thing is the context – when we have a surprisingly positive news – gold rallies, but is unable to hold gains. When we don’t get any news – gold continues to decline. This is a very bearish combination and it implies that it’s very likely that when we get a piece of information that is actually bearish for gold, it will react significantly and sharply.
Our yesterday’s comments on silver remain up-to-date as well:
Unsurprisingly, we can say the same about silver. The white metal moved a bit higher and it moved back down in today’s pre-market trading. The intra-day high, along with the mid-April high can be viewed as shoulders of a head-and-shoulder pattern, which would have bearish implications. Another bearish factor is that the volume that accompanied silver’s move higher yesterday was relatively low.
Silver declined to a new monthly low on increased volume. That’s a clear bearish sign.
As far as mining stocks are concerned, we wrote the following:
In the case of mining stocks, we saw a small, relatively low-volume move above the rising support line. Naturally, this breakout is not confirmed and given the pre-market decline in metals, it seems that it will be invalidated shortly. The outlook remains bearish.
The breakout was indeed invalidated shortly – on the same day. Miners are once again below the rising support line. The breakdown is not confirmed yet, but with new lows in gold and silver, it seems that the breakdown will be confirmed shortly.
Summing up, with gold and silver at new lows and the USD above the mid-April low (but not above this week’s high), the outlook for the former remains bearish. Metals are underperforming the USD and are not able to start a sustainable rally even with positive fundamental news. Therefore, the short positions in the precious metals sector remain justified from the risk to reward point of view. Today’s pre-market move higher in gold and silver ($1,273 and $17.06, respectively) doesn’t change the above as intra-day price moves are not as important as daily closing prices.
As always, we will keep you – our subscribers – updated.
To summarize:
Trading capital (our opinion): Short positions (150% of the full position) in gold and silver and regular (100% of the full position) short position in 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: $1,317, initial target price for the DGLD ETN: $89.05; stop-loss for the DGLD ETN $46.25
- Silver: initial target price: $12.13; stop-loss: $18.17, initial target price for the DSLV ETN: $61.16; stop-loss for the DSLV ETN $26.34
- Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $26.47, initial target price for the DUST ETF: $4.27; stop-loss for the DUST ETF $1.16 (the price for DUST is dependent not only on the prices of mining stocks themselves, but also on the way mining stocks decline and the real price that DUST will achieve will likely be much higher than this target, but the conservative pricing models don’t take - and generally can’t take - the above into account).
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: $39.43
- JDST ETF: initial target price: $5.78; stop-loss: $1.60
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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