Gold & Silver Trading Alert: Silver’s Outperformance and Gold-USD Link

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Briefly: In our opinion speculative short positions (full) are currently justified from the risk/reward point of view.

The finance.yahoo.com portal just featured an article, in which they discuss the big importance of the fact that gold rallied recently along with the USD Index (it turned out that they declined both, though). We already discussed that in the previous days, but we would like to revisit this topic today.

The key thing is that one shouldn’t miss the forest while focusing on individual trees. Let’s start with the forest (charts courtesy of http://stockcharts.com).

Long-term US Dollar price chart - USD

The USD Index bottomed in 2008 and 2011 and it moved much higher since that time. Gold formed important tops in 2008 and 2011 and it moved much lower since that time. In general, even though the 2 markets don’t necessarily move in the opposite directions on a short-term basis, it is clearly the case on a medium- and long-term basis (the similarity visible on the chart should have been more evident than it is, as gold’s chart has linear scale while USD has logarithmic one).

Naturally, the long- and medium-term trends are much more important than the short-term ones, and since with regard to them we can expect gold to move in the opposite direction to the USD Index, let’s keep in mind the key factor – that USD moved above the 92 level along with breaking above the rising long-term support line and that it spent about 1.5 years consolidating after this breakout. This consolidation took form of a big zigzag pattern, which serves as an indication that the consolidation is over and USD is likely to continue its rally.

The medium- and long-term implications for gold are bearish. This does not automatically imply a prolonged bear market in the coming years because ultimately gold’s positive fundamentals are likely to drive gold higher in the coming years, however, over the medium term and in light of a probable significant rally in the USD Index, it is likely that gold will move significantly lower.

That’s the forest – now, let’s move to the trees. Gold moved higher along with the USD Index in the past few days. Was this a game changer or was it driven by a one-time event? Naturally, the latter was the case – the Brexit voting made people sell European currencies and buy other currencies (USD is still viewed as the safe-haven currency, so it attracted capital) and gold.

The anxiety caused by the voting is now likely to diminish and the gold – USD link is likely to get back to normalcy. This means that medium- and long-term trends and relationships were most likely not affected and the same goes for the trends – which remain up in case of the USD Index and down in case of gold. If USD breaks above the 2015 highs and continues to rally, but gold refuses to decline, it will then most likely be a sign that the bull market in gold is really here – but we are far from seeing that as of today.

On a short-term note, the thing that is worth commenting on is silver’s outperformance in today’s pre-market trading. While gold moved up a little less than it had declined yesterday, silver moved higher by about $0.50, outperforming gold on a very short-term basis. This may appear bullish, but let’s recall that this is exactly the kind of performance that we saw at the tops in the past few years as a sign of excessive optimism among the investment public (which tends to favor silver over gold). Gold made headlines yesterday (and to a smaller extent the same is the case also today) and this is a different sign of the same thing – that the investment public is massively entering the market, which is likely to creating a top.

Summing up, it doesn’t appear that we have seen a real change in the gold-USD link, but rather a local anomaly in it caused by a single event – the Brexit voting. The medium-term trend in the USD Index remains up and the outlook for the USD remains bullish, and the implications for the precious metals market are bearish.

As always, we will keep you – our subscribers – updated.

To summarize:

Trading capital (our opinion): Short positions (full position) in gold, silver, and mining stocks are justified from the risk/reward perspective with the following entry prices, stop-loss orders and initial target price levels:

Gold: initial target price: $1,006; stop-loss: $1,423, initial target price for the DGLD ETN: $86.30; stop-loss for the DGLD ETN $44.35
Silver: initial target price: $12.13; stop-loss: $18.67, initial target price for the DSLV ETN: $65.88; stop-loss for the DSLV ETN $24.16
Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $30.77, initial target price for the DUST ETF: $47.90; stop-loss for the DUST ETF $3.62

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 ETF: initial target price: $14.13; stop-loss: $50.70
JDST ETF: initial target price: $61.74; stop-loss: $1.97

Long-term capital (our opinion): No positions

Insurance capital (our opinion): Full position

Plus, you might want to read why our stop-loss orders are usually relatively far from the current price.

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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