Briefly: In our opinion, full (150% of the regular full position) speculative short positions in gold, silver and mining stocks are justified from the risk/reward perspective.

Silver reversed in a quite profound way yesterday and the question in many of gold and silver investors’ mind’s is whether it marked the bottom for the current decline.

In our opinion, it’s not likely. Let’s take a closer look at the chart (charts courtesy of http://stockcharts.com).

Silver indeed reversed, but if we put the intra-day move into perspective, we see that it was not a huge reversal and that it was not accompanied by significant volume. It is not often the case that silver bottoms through a daily reversal, but when it did in the past year, the reversals were accompanied by relatively big volume. Since this wasn’t the case yesterday, it doesn’t seem that the reversal should be trusted or that we should put much emphasis on it.

This is especially the case since neither gold, nor mining stocks confirm the move.

Gold declined a bit and miners were more or less flat. The latter also reversed in an insignificant way and – just like in the case of silver – the volume was also rather insignificant. Consequently, it doesn’t seem that anything changed from the short-term point of view yesterday.

While most people focused on silver’s “major” reversal, something else – with more important implications – happened this week.

There was a breakdown below the 2015 lows in one of the most important ratios – the gold to S&P 500 ratio and this week it got confirmed. This in turn confirmed the earlier breakdown in the Gold to Dow ratio. In other words, compared to the performance of stocks, gold is already breaking to new lows. The implications may not be immediate, but they are very bearish for the following weeks.

The breakdown in the gold to S&P ratio may not be evident on the above chart, but we actually saw one daily close below the 2015 low, then 2 daily closes when the ratio moved higher but still didn’t close back above the 2015 low (thus confirming the breakdown) and based on yesterday’s price action, we saw another move lower – a sign that the post-breakdown bounce is likely over. Again, the implications are bearish.

Summing up, it seems that yesterday’s move back and forth in silver (and in mining stocks) doesn’t change much and it still it appears that we could see a corrective upswing once gold moves to its 2015 bottom. Depending on the bullish confirmations that we may (!) see at that time, we may decide to take profits on the current short positions or even to very temporarily open a long position, but it’s too early to do any of the above at this time. Either way, it seems that the final bottom in the precious metals market will form below the 2015 low and we strongly suggest preparing for it.

For now, we are moving the initial target for gold to correspond to the above and we are changing it into an exit order (profit-take order). In other words, if this level is hit, the position should be closed automatically. We are not making analogous decisions regarding silver or mining stocks as their targets are less clear. If the exit order for gold is reached, it means that closing the entire short position (also in silver and mining stocks) will become justified from the risk to reward point of view (not only gold).

Moreover, please note that at this time, only the exit level for gold is binding, and the price levels for DGLD are not (as the price of DGLD and other leveraged ETNs could change also due to the time decay factor).

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

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): Short positions (150% of the full position) in gold, silver and mining stocks are justified from the risk/reward perspective with the following stop-loss orders and initial target price levels / profit-take orders:

• Gold: exit-profit-take level: $1,063; stop-loss: $1,183; initial target price for the DGLD ETN: $; stop-loss for the DGLD ETN $58.77
• Silver: initial target price: $13.12; stop-loss: $17.53; initial target price for the DSLV ETN: $46.18; stop-loss for the DSLV ETN $24.86
• Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $22.62; initial target price for the DUST ETF: $143.56; stop-loss for the DUST ETF $41.88

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: $38.12
• JDST ETF: initial target price: $104.26; stop-loss: $28.88

Long-term capital (core part of the portfolio; our opinion): No positions (in other words: cash)

Insurance capital (core part of the portfolio; 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 signs 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, Gold & Silver Fund Manager

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