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. This position was originally featured on Jan. 12, 2017 at 3:49PM.
The biggest news yesterday was the stocks’ profound daily rally. Both the DJIA and S&P 500 soared and the latter even touched the 2400 level. Since in today’s globalized economy and integrated financial markets no market can move truly on its own, it’s natural to expect that the big move in stocks will have some kind of impact on other markets – including gold and silver. Let’s examine what kind of impact it is.
Theoretically, the general stock market’s rally should have the biggest impact on mining stocks (after all, they are stocks as well) and silver (due to silver’s multiple industrial applications – a stronger economy implies greater demand for goods in which silver is used).
In practice, we weren’t expecting any special fireworks from the mining stocks as they have been underperforming to a great extent for many days and it didn’t seem there was any reason, as to why they would start reacting to bullish news yesterday (and that’s what happened: namely, nothing really changed in the case of miners – GDX moved higher by 13 cents and that’s it).
As far as silver is concerned, we could have seen a bigger move based on the stock market’s rally – but we didn’t. Silver’s outperformance (along with its previous strength), however, was significant enough to change something. Let’s take a look at the silver to gold ratio chart for details (charts courtesy of http://stockcharts.com).
It is not the ratio itself that features a substantial change – it’s the RSI indicator based on it. The point is that whenever this indicator moves above 70, it suggests that the precious metals’ rally is ending. In particular, each time after silver’s 2011 top, a move to/above the 70 level and back below it meant that a major top is in.
Now, we haven’t seen a move back below the RSI yet, but it’s obvious that it can’t move back below 70 if it doesn’t rally above it first. Since the RSI just moved a bit above 70, it means that even a relatively small weakness (or at least average performance) of silver against gold can generate a substantial sell signal for the entire precious metals sector.
What about gold’s link with the general stock market?
When we compare gold’s performance to the one of the S&P 500 Index, we see that this year’s rally has been just a tiny pause after gold (precisely: its ratio to stocks) reached the 2015 lows. The important thing is that the gold to stocks ratio lost its momentum and is now starting to decline. The previous breakdown (marked on the chart) resulted in a big slide in both the ratio and gold itself. Consequently, the current weakness should not be ignored.
This is particularly the case, because the ratio already paused and corrected after reaching the 2015 lows, so another attempt to break below this level is much more likely to be successful. Since there is no strong support right before the 2015 lows, the decline that follows the breakdown is likely to be significant in case of both the ratio and gold itself (just like it was the case in the final part of 2016).
Summing up, while not much seems to have happened directly in the precious metals market yesterday, it appears that the stock market’s link with silver and with gold have both important and bearish consequences. This, plus other factors discussed in the previous alerts imply that the outlook for the precious metals market remains bearish.
As always, we will keep you – our subscribers – informed.
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: $1,273; initial target price for the DGLD ETN: $81.88; stop-loss for the DGLD ETN $48.17
- Silver: initial target price: $13.12; stop-loss: $18.67; initial target price for the DSLV ETN: $46.18; stop-loss for the DSLV ETN $19.87
- Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $26.34; initial target price for the DUST ETF: $143.56; stop-loss for the DUST ETF $21.37
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: $45.31
- JDST ETF: initial target price: $104.26; stop-loss: $10.78
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
Please note that the in the trading section we describe the situation for the day that the alert is posted. In other words, it we are writing about a speculative position, it means that it is up-to-date on the day it was posted. We are also featuring the initial target prices, so that you can decide whether keeping a position on a given day is something that is in tune with your approach (some moves are too small for medium-term traders and some might appear too big for day-traders).
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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