Gold & Silver Trading Alert: Silver Soars, Gold Breaks Out – Is the Bottom In?

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Briefly: In our opinion no speculative positions are currently justified from the risk / reward perspective. In other words, we think that taking profits off the table and closing the short position in the precious metals sector is a good idea.

We planned not to send any alerts this week, but we also promised that we would keep you updated in case anything changed. Here’s what changed in our opinion, and what didn’t.

Gold moved above the declining trend channel and the 2013 lows (but only if we look at the intra-day lows). What changed? Not much, because the size of the move was too small to confirm the breakout on its own. Moreover, gold closed the week below the lowest close of 2013, so in terms of closing prices, there was no move back above 2013 lows.

The Dow to gold ratio remains above the previously broken 2008 highs. Since there was no invalidation of the breakout, the outlook remains bullish and it seems that this ratio will move considerably higher in the following weeks. This suggests that gold will move considerably lower in the following weeks.

Silver moved sharply higher last week, breaking above the declining resistance line and moving to its late-Feb high. Silver corrected part of the move and ended the week at the 50-day moving average. Was this breakout a sign of strength in the precious metals market? Not necessarily - as we have often emphasized in the past (and profited on it) - silver tends to reverse shortly after a breakout and move much lower.

Consequently, this breakout is not much of a bullish signal. Moreover, please recall that silver’s cyclical turning point is just around the corner and given Friday’s rally, the most recent move is most definitely up, so the turning point has bearish implications.

Miners moved higher and the price / volume action was rather positive – the GDX ETF moved higher on volume that was visibly stronger than the one that we had seen on Thursday. The move back above the rising, short-term support / resistance line was confirmed by 3 consecutive closes above it. Consequently, we could see some more strength (perhaps a move to $20.5 or so in the GDX ETF) in the following days.

Summing up, we don’t think that the medium-term outlook changed and we continue to think that staying out of the precious metals market in case of the long-term investment capital is a good idea, but the outlook for the next several days is rather unclear at this time. It seems likely that the decline in precious metals and mining stocks will continue, but it’s unclear at what exactly price levels the move down will indeed resume.

Consequently, even though it is tempting to keep the current short positions in gold and mining stocks (and reopen the one in silver) and just wait it out, we think that at this time this is no longer justified from the risk/reward perspective. If we didn’t have a short position open at this time, we wouldn’t open it today - we would wait for additional confirmation that the corrective upswing is very likely over.

Consequently, it seems that exiting the entire short position and taking profits at the current levels (gold was about $120 higher when we had opened this short position) is currently a good idea. Once we see additional bearish confirmations and fewer bullish signs, we will likely re-open this position. If we do so at higher prices, it will mean overall increased profits compared with the “wait-the-correction-out approach”. Regardless of the price levels at which we re-enter the short position, we will do so at lower risk levels than we have right now. Consequently, the risk/reward ratio favors taking profits off the table at this time, and that’s why we think it’s a good idea to do so.

The next Gold & Silver Trading Alert is scheduled for Monday, March 30, 2015.

To summarize:

Trading capital (our opinion): No positions

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 automated tools (SP Indicators and the upcoming self-similarity-based tool).

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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