Gold & Silver Trading Alert: Reversal vs. Underperformance

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Briefly: In our opinion speculative short positions (full) are currently justified from the risk/reward point of view.

Gold’s performance yesterday can be described as relatively weak as it didn’t rally despite a move lower in the USD Index. On the other hand, gold moved lower initially and then it came back, so there is a reason to think that yesterday’s session had bullish implications. Which factor is stronger?

Generally, a lot depends on the context, and a large part of the context is provided by volume. The volume was not big or even significant, so the reversal is not really meaningful and we don’t view it as a bullish sign. However, the size of the underperformance of gold vs. the USD was also small, so it’s not a major bearish factor either (the implications were more bearish before the session than they were once it ended). Overall, we think that yesterday’ session didn’t change much.

Let’s take a closer look (charts courtesy of http://stockcharts.com).

Short-term US Dollar price chart - USD

Short-term Gold price chart - Gold spot price

Short-term Silver price chart - Silver spot price

Taking the closing prices into account, we see that the moves in the USD Index and the metals were rather insignificant and they didn’t change anything. Today, the USD declined a bit and gold and silver moved higher in a rather normal way, but with gold at about $1,250, there are no significant changes either. If gold manages to close above the 50-day moving average today, then we will have a breakout and this could change the risk to reward situation (but it doesn’t have to – it depends on what happens in other markets), but it’s too early to say that this is the case at this moment.

Silver moved higher more visibly today, but since silver’s outperformance on a very short-term basis is actually something that we see before declines, we don’t view that as bullish.

The USD Index has support at 93.43 and if it closes the day below it, more weakness could follow and this would be a bullish factor for gold. However, it doesn’t seem like this will be the case. Even if it would, we don’t think that the USD would move and stay below the previous 2015 low, due to the situation in the long-term USD chart.

GDX - Market Vectors Gold Miners - Gold mining stocks

Mining stocks moved lower and the volume was low, which is a rather neutral sign. If the volume had been bigger or gold had actually moved higher while the miners stayed down, we would have bearish implications, but what we saw yesterday was too weak. In today’s pre-market trading miners cancelled yesterday’s move lower, so they are more or less performing as gold is. There are no immediate implications of this action.

Summing up, nothing really changed yesterday and in today’s pre-market trading and it seems that metals and miners are still correcting within a bigger downtrend. Metals and miners rallied after an unexpectedly bad employment report was released but the near-zero probability of a rate hike in June is already factored in the prices, so it doesn’t have to push the prices higher. In fact, if the announcement regarding rates is accompanied by hawkish comments regarding a rate hike in July, gold will be likely to decline in the very short-term. Whatever happens, let’s keep in mind that from the long-term point of view, the precious metals sector is likely to move lower in the coming months.

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: $1,317, initial target price for the DGLD ETN: $86.30; stop-loss for the DGLD ETN $43.71
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: $26.47, initial target price for the DUST ETF: $47.90; stop-loss for the DUST ETF $8.11

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: $40.13
JDST ETF: initial target price: $61.74; stop-loss: $9.38

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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