Briefly: In our opinion, short (full) speculative positions in gold, silver and mining stocks are justified from the risk/reward point of view.

Gold, silver and mining stocks declined significantly at the beginning of the week, but they moved higher (quite visibly higher in the case of silver and miners) on Thursday and Friday. Does this reversal herald much higher prices?

In short, not likely. We received quite a few e-mails with questions regarding Thursday’s and Friday’s price action, so we decided to post Monday’s alert earlier. It’s usually best for us to have the entire weekend to think things through, but it looks like the signals are quite clear at this time, so – assuming that you would appreciate an early update – here we are.

Let’s start with the context. We previously wrote that the situation was similar to what had happened on Oct. 15, 2014 and in the following days, and this remains remarkably up-to-date. The general stock market formed a major weekly reversal in both cases and from this perspective, the situation is very similar. The really interesting part of the similarity is the link between the USD and gold. Let’s take a closer look (charts courtesy of http://stockcharts.com).

On Oct. 15, 2014 the USD and general stock market both declined significantly, so that’s where the similarity comes into play. What happened shortly thereafter? The USD rallied and gold declined, but… not before an additional small upswing. Gold declined about $100 at that time, so the small move higher didn’t mean much, anyway. The point is that an immediate move lower was not a sure bet this time (and that’s why we put the stop-loss levels relatively high – not betting on an immediate decline, but rather on a decline that is likely to continue for a few weeks).

Now, even though it wasn’t expected of gold to decline right away – it did. Gold declined visibly last week and given the mentioned analogy, gold’s performance last week is a sign of weakness. It is not particularly important that gold moved a bit higher on Thursday and Friday – it’s important that overall it moved lower during the week.

Moreover, the USD Index is likely about to break out above the declining resistance line and breakouts in the USD (as visible on the above chart) are particularly bearish for metals and miners. Consequently, the implications of the above analogy and the chart are bearish.

Having said that, let’s move on to gold. In Friday’s alert we wrote the following:

In yesterday’s alert we emphasized that gold broke (insignificantly, but still) below the short-term rising support line. Gold didn’t move back above this line and it closed below it for another day, so the situation on the above chart deteriorated a bit. If gold closes below the mentioned line also today (which would also mean a weekly close below it), the breakdown will be confirmed and the implications will be even more bearish.

Gold managed to do just that – it closed below the rising support/resistance line. We put an additional line on the chart (the one based on daily closing prices) and the breakdown was confirmed in for both lines. The breakdown was confirmed by 3 consecutive daily closes and a weekly close. The implications are bearish.

Additionally, Thursday’s and Friday’s rally took place on relatively low volume, so it look like this move is just a correction within a bigger downtrend.

Moving back to the big picture and comparing gold’s performance to the general stock market, we see that despite the intra-week turbulence, there was no confirmed breakdown below the rising support line. The support held (in terms of weekly closing prices and we think it’s more proper to consider these closes than daily ones as the chart and shifts visible on it are of a long-term nature) and consequently the ratio is likely to move higher. The implications for gold are bearish.

From the non-USD perspective, gold also seems to be continuing its medium-term decline. The yellow metal moved to the declining resistance line and turned south once again. The trend remains down.

On the silver chart, we see that the white metal didn’t move much below the Nov. 2014 low (but still, it did), but we see something just as (or more) important. Silver just broke below the previous lows in terms of weekly closing prices and that’s a very important event. In 2 out of 3 previous cases (in the past few years) silver plunged very far after such breakdowns and in the remaining case it also declined, but not as significantly (the move was significant from the short-term perspective, though).

The decline took place on relatively high volume (in fact, it’s the highest weekly volume in years), so the implications are bearish from this perspective as well.

The situation in short-term silver chart and the GDX ETF chart is very similar so we will comment on both of them simultaneously.

Both silver and miners moved more visibly higher than gold did, but it’s no wonder since they both declined much more sharply.

The volume in both cases was smaller than during the decline (not small on an absolute basis, though), but more importantly, the rally didn’t take silver and miners above the 38.2% Fibonacci retracement level. Therefore, technically, these upswings are just corrections of the previous decline.

Other than the above, there’s actually little to say about the recent moves higher in silver and miners.

Summing up, the situation and outlook didn’t change based on yesterday’s price move and the outlook remains bearish. Just because a price of a given asset (like silver or mining stocks) moves higher it doesn’t necessarily mean that the outlook is improving (in fact, in the case of gold, the outlook deteriorated because the rally didn’t take gold back above the rising support/resistance line and thus the breakdown was confirmed). Corrections have to happen from time to time and it seems that we’re seeing one right now.

The analogy to the similar session (Oct. 15, 2014), gold’s underperformance relative to the USD Index, and other technical signs make us think (our opinion) that much lower prices are in the cards and that the short positions will become much more profitable than they already are (despite natural corrections along the way).

Please note that this is Monday’s alert - we’re just sending it earlier. If there are major changes in the precious metals market, we will send another alert on Monday as well, but if not (which is more likely), the next one will be posted on Tuesday.

As always, 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 (! – this means that reaching them doesn’t automatically close the position) target prices:

• Gold: initial target price: $1,050; stop-loss: $1,213, initial target price for the DGLD ETN: $98.37; stop loss for the DGLD ETN $65.60
• Silver: initial target price: $12.60; stop-loss: $16.73, initial target price for the DSLV ETN: $96.67; stop loss for DSLV ETN $40.28
• Mining stocks (price levels for the GDX ETN): initial target price: $11.57; stop-loss: $17.33, initial target price for the DUST ETN: $41.10; stop loss for the DUST ETN $8.54

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: initial target price: $16.27; stop-loss: $24.33
• JDST: initial target price: $16.98; stop-loss: $3.42

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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