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

The situation in the silver market has been particularly interesting in the last several days due to silver’s recent breakout above the declining long-term support / resistance line. Silver has just moved back below this important line once again – will this trigger a sharp sell-off? Let’s take a closer look (charts courtesy of http://stockcharts.com).

Quite likely, but it’s not extremely likely just yet as we haven’t seen a weekly close below this line, and - based on our experience - in the case of long-term lines, weekly confirmations are much more important than daily ones.

The situation deteriorated based on yesterday’s price action, though.

The gold price has simply paused and the pause was accompanied by smaller – but still significant – volume. Market participants were eager to both buy and sell but the buyers were not strong enough to push gold back above the previously broken rising support line. If we see an additional daily close below this line (and we probably will), the breakdown will be verified.

The situation is most clear in the case of gold stocks, which seem to be leading metals lower.

The HUI Index is moving lower in tune with our expectations. Gold stocks moved lower after the point marked with the vertical green dashed line. We have just seen a sell signal from the Stochastic indicator and it serves as a confirmation that much lower values are to be expected relatively soon.

This sell signal is not only important and very bearish on its own, but it’s also the case that the situation in the Stochastic indicator is now very similar to what we saw previously before major declines. The implications are – again – bearish, as the history tends to repeat itself to a considerable degree.

On a short-term basis, we see that miners moved a bit higher and that they did so on low volume. This suggests that the move higher was just a temporary correction and that the true direction in which the miners are moving is down.

The following gold-stock-related ratios seem to confirm the above.

We saw another sharp move lower in the gold stocks to gold ratio and it’s something that preceded significant declines in the precious metals sector – the implications are bearish.

Please note that mining stocks are now almost as cheap relative to gold as they were at the beginning of this bull market – they are clearly oversold, but that doesn’t mean that they will not become even more oversold in the not-too-distant future.

Finally, comparing the prices of gold stocks to other stocks, we see that the medium-term trend didn’t change and that it simply remains down. The implications are bearish. How low can the above ratio move before the final bottom is in? Quite likely to the late-2001 low or even the 2000 low.

Summing up, the situation deteriorated yesterday, but not very significantly. We still have to see the invalidation of the silver’s breakout in terms of weekly closing prices before we can say that the corrective upswing is (very likely) over. The move below the declining support/resistance line is bearish, but not extremely bearish just yet. The breakdown in gold is almost confirmed and mining stocks seem to be continuing to lead metals lower – likely much lower. The overall outlook for the precious metals sector remains bearish – it seems that the final bottom is still ahead of us.

We realize that gold’s lack of exciting movement (it’s been moving back and forth around the $1,200 level for weeks) is discouraging and boring, but it seems very likely that patience will be well rewarded. It’s before the move that one should be paying extra attention to the signals, not after it. The former is definitely the case at this time.

We will keep you – our subscribers – updated.

To summarize:

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

• Gold: initial target price: $1,115; stop-loss: $1,253, initial target price for the DGLD ETN: $87.00; stop loss for the DGLD ETN $63.78
• Silver: initial target price: $15.10; stop-loss: $18.13, initial target price for the DSLV ETN: $67.81; stop loss for DSLV ETN $38.44
• Mining stocks (price levels for the GDX ETN): initial target price: $16.63; stop-loss: $21.83, initial target price for the DUST ETN: $23.59; stop loss for the DUST ETN $10.37

In case one wants to bet on lower junior mining stocks' prices, here are the stop-loss details and initial target prices:

• GDXJ: initial target price: $21.17; stop-loss: $28.68
• JDST: initial target price: $14.35; stop-loss: $5.65

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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