Briefly: In our opinion, long (half) speculative positions in gold, silver and mining stocks are justified from the risk/reward point of view.
Friday was more exciting than the previous days for precious metals investors, but not extremely so. Silver ended the session higher, but mining stocks gave up their early gains and ended up the session without an important change. Those who have been following our analyses for some time know that usually when silver outperforms and miners lag, we are at a local top, but this time there’s also another factor that needs to be considered – the declining USD Index, which could trigger more strength in the precious metals sector. What’s likely to happen next?
In short, we continue to view the situation a bullish but not extremely so for the short term. The mentioned combination of the performance of silver and mining stocks is bearish for the short term, but the USD’s possible decline could support higher prices in PMs. That is not crystal clear, though. Let’s take a look at the charts (charts courtesy of http://stockcharts.com).
The small breakdown below the lowest of the support lines was just invalidated on strong volume (and the latter is a bullish sign on its own). This is a bullish sign, but the fact that gold remains below 3 other lines is more important.
At the same time, gold managed not to decline below its recent July low, so technically it is after a local bottom – the implications are bullish.
The RSI indicator, however, is no longer below 30, which means that the situation is no longer heavily oversold as far as short term is concerned.
Overall, the above chart is rather unclear.
Silver moved higher, but the rally was in tune with previous daily patterns that were followed by lower prices. Silver moved above the 20-day moving average on an intra-day basis only to decline later during the day and close right at it. The implications “should” be bullish based on the classic way technical analysis is usually applied, but based on our experience with the white metal, we view the implications of the above chart as unclear, not bullish.
In the previous alert we wrote the following:
Yesterday we commented on the above chart by saying that the HUI’s decline was not something particularly important as the index had moved lower but not to the next significant resistance level. Yesterday’s rally seems to confirm that. Unless miners plunge again today, they will form a weekly reversal candlestick, which will have bullish implications.
Miners didn’t plunge and they indeed formed a bullish reversal candlestick. This has bullish implications for the next few weeks, and we can say the same about the buy signal from the weekly Stochastic indicator.
The short-term chart does not have implications that are as bullish as the long-term one. Miners moved higher only temporarily and overall the Friday session was not bullish. It was not particularly bearish either because gold moved only a little higher, so the fact that miners didn’t rally is not really concerning. If we had seen this kind of action during gold’s $20 rally, that would have been a very bearish phenomenon, but gold moved higher by only $4.30, so there are little implications, if any.
The thing that could trigger higher prices of precious metals in the near term is the USD Index, which seems likely to correct in the near future. The USD declined after the initial breakout above the declining resistance line, thus invalidating it – which is a bearish sign for the USD. Moreover, the cyclical turning point for the USD was just seen and the previous move was to the upside, so the odds are the USD index will decline sooner rather than later. This is likely to have bullish implications for the precious metals sector as both sectors are negatively correlated.
The 30-day correlation between gold and the USD Index is -0.76, which means that the correlation is negative and relatively strong. The implications are bearish for the precious metals sector.
Summing up, from the medium-term perspective nothing changed in the precious metals market recently as the situation was and still is bearish (we don’t think the final bottom for this decline is in yet), but it still seems that we can see a corrective rally before the decline continues (and we think that taking profits off the table and closing our previous short position when silver moved to $14.33 was a good idea).
There are more bullish factors than bearish ones (the bearishness in the mainstream media being the most significant bullish factor), but the situation is not extremely bullish, so we think that only limited (half of the regular size) speculative long positions are justified from the risk / reward perspective at this time.
We will keep you – our subscribers – updated.
To summarize:
Trading capital (our opinion): Long position (half) 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: $1,130; stop-loss: $1,063, initial target price for the UGLD ETN: $9.24; stop loss for the UGLD ETN $7.69
- Silver: initial target price: $15.20; stop-loss: $14.12, initial target price for the USLV ETN: $14.40; stop loss for USLV ETN $11.51
- Mining stocks (price levels for the GDX ETN): initial target price: $15.87; stop-loss: $12.37, initial target price for the NUGT ETN: $5.17; stop loss for the NUGT ETN $2.46
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: $21.78; stop-loss: $17.67
- JNUG: initial target price: $12.01; stop-loss: $6.39
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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