Briefly: In our opinion, short (full) speculative positions in gold, silver and mining stocks are justified from the risk/reward point of view.
On Friday, we saw a continuation of the patterns we had seen on Thursday. Silver continued to rally, gold moved higher as well, but miners declined and closed the week at a level that had not been seen in more than a decade. Which part of the market, silver or miners, is leading the way for the rest of the sector? The answer is extremely important, as we are likely on the brink of a major move in the entire precious metals market.
Based on our experience, it’s most likely the case that the move in mining stocks is the true one, not what we saw in silver. This might seem odd for those who haven’t been following our analysis for a long time, but there are often little to no implications of the white metal’s technical signs (not all of them, though, turning points work quite well), as silver often provides fake technical signals – especially breakouts and especially when other parts of the precious metals market are not confirming silver’s signs.
Before we move to the charts, please note that multiple other factors that are currently in place were covered in detail in Wednesday’s alert – they remain up-to-date, so if you haven’t had the chance to read Wednesday’s alert, we encourage you to do so today.
Having said that, let’s take a look at the charts (charts courtesy of http://stockcharts.com).
Gold moved only a bit higher on Friday (just like it had done on Thursday) and the move took place on relatively low (and decreasing) volume. Gold had declined on huge volume and it now moved higher on low and declining volume – that’s normal during counter-trend corrections, so the implications are bearish.
Silver’s lowest daily close of 2014 was $15.29 and now silver closed at $15.57 – still quite close to the low. Is silver showing significant strength? Not likely – it had a good reason to rally in the form of a rallying stock market (stocks can and at times do impact silver due to the white metal’s multiple industrial uses). It moved higher on declining volume and it didn’t break above the short-term declining resistance line and the 20-day moving average.
The situation seems similar to what we saw in late February – silver corrects after a sharp slide to the 20-day moving average, but it’s not the end of the decline, rather its middle.
What about mining stocks?
One might have expected miners to finally rally at least a bit given a move higher in gold and silver. Both key indices: the XAU and HUI actually declined once again. We even saw a breakdown below the last weekly already-extremely-low closing price. The post-breakdown slide simply continues and the implications are very bearish. The situation seems very similar to what we saw in April 2013, as we discussed in greater detail on Wednesday.
The mining-stocks-related ratios paint the same bearish picture.
Miners are exceptionally weak relative to both other stocks and gold. We also saw breakdowns below major support levels. The HUI to gold ratio even managed to slide and close the week well below its 2000 low. This is a major bearish signal for the entire precious metals sector and temporary strength in silver doesn’t invalidate it.
Overall, since we saw a repeat of Thursday’s moves and nothing really changed, we can summarize the current situation just as we did previously:
Summing up, the situation in the precious metals market remains very bearish. Silver’s small move above the 2014 low is not significant while the miners’ continuous weakness is. Overall, little changed on Friday and our previous expectations remain up-to-date: we think that the precious metals market will move lower in the coming weeks.
We will keep you – our subscribers – updated.
To summarize:
Trading capital (our opinion): Short position (full) position in gold, silver and mining stocks is justified from the risk/reward perspective with the following stop-loss orders and initial (!) target prices:
- Gold: initial target price: $1,062; stop-loss: $1,208, initial target price for the DGLD ETN: $95.88; stop loss for the DGLD ETN $66.49
- Silver: initial target price: $12.72; stop-loss: $17.11, initial target price for the DSLV ETN: $102.21; stop loss for DSLV ETN $38.32
- Mining stocks (price levels for the GDX ETN): initial target price: $14.12; stop-loss: $18.73, initial target price for the DUST ETN: $30.68; stop loss for the DUST ETN $14.08
In case one wants to bet on lower junior mining stocks' prices (we do not suggest doing so – we think senior mining stocks are more predictable in case of short-term trades – we if one wants to do it anyway, we provide the details), here are the stop-loss details and initial target prices:
- GDXJ: initial target price: $18.12; stop-loss: $25.78
- JDST: initial target price: $16.26; stop-loss: $5.79
Long-term capital (our opinion): No positions
Insurance capital (our opinion): Full position
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
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