Briefly: In our opinion, a speculative short position (half) in gold, silver and mining stocks is justified from the risk/reward point of view.
The precious metals sector - overall - declined once again yesterday, but that wasn't the case for mining stocks. They showed strength once again and it seems that this performance got many traders excited - was there really a good reason for it or is this just another fake move?
The latter seems much more likely in our view. The reason is the size of the volume and the fact that other stocks rallied as well yesterday. Before discussing the above in greater detail, let's take a look at gold (charts courtesy of http://stockcharts.com).
The decline in gold was not that significant but it was accompanied by increased volume. Once again, it looks like the volume tells us that the real move is to the downside and the upswings are just corrections. Please note that seeing the same signal for several days makes it more important and more reliable - that is the case with the price-volume situation.
The silver market moved lower once again and it declined in quite a visible way. In fact, silver is already about $1 lower than it was when we had written about opening short positions. The volume accompanying the decline was relatively high, so - just like in the case of gold - it seems that we're seeing a bigger decline and the daily upswings within it are just corrections.
The situation looks quite different in the case of mining stocks - but the outlook is the same. Miners rallied yesterday but in this case, the accompanying volume was low. This suggests that lower values are to be expected as the buying power is likely drying up.
If it wasn't the real strength of miners that caused them to rally, then what was it? Quite likely it was the overall move higher in stocks that caused miners to rally as well. After all mining stocks are... stocks and will quite often move with other stocks on a short-term basis. If metals continue to decline, however, we expect miners to catch up with them and decline quickly as well.
Before summarizing, let's take a look at the performance of mining stocks relative to other stocks. Interestingly, there's not much to be excited about. Miners may seem strong on a short-term basis, but taking a look at the long-term picture allows us to see that the trend remains down and that the strength that we saw this and last week didn't change anything.
Summing up, the outlook for the precious metals sector remains bearish and yesterday’s price-volume action confirms it. We are close to the moment when we will (most likely) write about doubling the size of the short position, but we are not there just yet. This may change, when mining stocks break below their recent highs. Meanwhile, the current short position in the precious metals sector remains profitable and the gains are particularly high in the case of silver.
We will keep you – our subscribers – updated.
To summarize:
Trading capital (our opinion): Short (half position) 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: $1,115; stop-loss: $1,253, initial target price for the DGLD ETN: $87.00; stop loss for the DGLD ETN $63.78
- Silver: initial target price: $15.10; stop-loss: $17.63, initial target price for the DSLV ETN: $67.81; stop loss for DSLV ETN $44.97
- Mining stocks (price levels for the GDX ETN): initial target price: $16.63; stop-loss: $21.83, initial target price for the DUST ETN: $23.59; stop loss for the DUST ETN $12.23
In case one wants to bet on lower junior mining stocks' prices, here are the stop-loss details and initial target prices:
- GDXJ: initial target price: $21.17; stop-loss: $27.31
- JDST: initial target price: $14.35; stop-loss: $6.18
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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