Gold & Silver Trading Alert: Silver Soars!

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

The entire precious metals sector moved higher yesterday, but it was the white metal’s rally that was particularly significant – it truly soared, outperforming both gold and mining stocks. Such an important move is likely to have just as important implications. It does.

Before moving to silver, let’s take a look at gold (charts courtesy of http://stockcharts.com).

Short-term Gold price chart - Gold spot price

Gold moved higher, but it was nothing extraordinary in this move. Gold corrected to the 50-day moving average, just like it has done multiple times in the past without changing the trend. In fact, please note that there were many times when gold moved even a bit above this moving average only to decline shortly once again: Oct. 2013, Apr. 2014, May 2014, Aug. 2014, Oct. 2014, Mar. 2015, Apr. 2015, Jun. 2015 and just a few weeks ago.

The volume that accompanied the daily rally was not low, but that doesn’t change much – in the mentioned cases it was similarly big and gold declined relatively soon after such a rally.

The Stochastic indicator flashed a buy signal, but that doesn’t change much either, because the daily version of this indicator was not really reliable in the past.

All in all, gold corrected and there are no signs that anything more happened yesterday.

Short-term Silver price chart - Silver spot price

Silver moved higher and – just like gold – it moved to its 50-day moving average, but – unlike gold’s move – silver’s rally was significant. The implications are bearish. Viewing a daily rally on significant volume as a bearish sign seems to be against the direct way in which one can apply classic technical analysis, but the key thing that one needs to keep in mind is that this analysis and the analogies to past situations need to be applied to each market differently. “Technical rules” are not set in stone – they are more like guidelines that leave discovering the details to the one analyzing the market. The “problem” for those who are new to the silver market is that it doesn’t act in a classic way. We saw silver’s fake breakouts and false outperformance on many occasions and we witnessed and profited on the subsequent declines almost as many times. Consequently, we are far from viewing silver’s strength and outperformance as a true bullish sign. We view it as a bearish phenomenon.

Long-term Silver price chart - Silver spot price

What can we say about silver’s rally from the long-term perspective? That it’s negligible. It’s just another move to the 10-week moving average – similar to many other corrections within the medium-term decline.

What about mining stocks? Was their rally extraordinary?

HUI Index chart - Gold Bugs, Mining stocks

Not really. The decline continues and it’s still similar to what we saw during the previous downswing (red dashed lines on the above chart). Yesterday’s rally didn’t even make the decline less steep.

In our opinion, the sell signal from the weekly Stochastic indicator is a much more important signal than yesterday’s rally, and the implications continue to be very bearish for the medium term.

Before summarizing, we’d like to publish a reply to a question that we received yesterday. We were asked if we were concerned that gold might be “forecasting” a zero interest rate (no hike) announcement by the Fed and that gold could be “off to the races”. Our reply is that it could be the case, but then again, it could also be the case that someone wants the little guys to invest a lot today [on Wednesday] only to take advantage of them and slam the market tomorrow [on Thursday]. Silver’s reaction suggests that the latter is more probable.

Summing up, we saw some strength in the precious metals market yesterday, but it didn’t change much, if anything. The medium-term trend was and still is down. The corrective upswing was not out of the question and we continue to think that not focusing on it – but on the medium-term move is appropriate at this time. If we get a rate hike, it’s likely that metals and miners will decline substantially. If we don’t get a rate hike, it’s likely that we’ll see a small rally and some sideways movement, which is likely to be followed by a bigger decline anyway. Either way, focusing on the medium-term decline seems to be appropriate. It seems that the profits from our short position will increase significantly in the coming weeks (not necessarily days).

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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