Briefly: In our opinion speculative short positions (full) in gold, silver and mining stocks are justified from the risk/reward perspective. We are keeping the stop-loss levels at their current levels, which means that we are effectively keeping some gains locked in and at the same time we’re allowing the profits to increase.
The USD Index soared yesterday and precious metals declined as one would expect them to. However, the opposite was the case with mining stocks – both gold and silver miners rallied. Is the rally over?
Not likely, but we could finally see some very short-term strength that we wrote about in the previous alerts. Let’s jump right to the charts (charts courtesy of http://stockcharts.com).
From the long-term point of view we clearly see a move below the 2013 lows and the proximity of both the 2014 lows (in terms of price) and the long-term cyclical turning point (in terms of time). The implications of the former are that we can expect to see some kind of corrective upswing, but also a sharp slide when these lows are broken, and the implications of the latter are that the above is likely to take place quite soon (a few weeks or months away).
The lower border of the declining trend channel was reached, so we would not be surprised to see a corrective upswing soon (perhaps to the $1,180 level or so). However, just like it was the case in the final part of February, the move higher doesn’t have to happen and betting against the trend is usually a bad idea as the surprises will be in the trend’s direction. At this time it seems that keeping the current positions intact is still justified from the risk/reward perspective (it’s unlikely that they would become unprofitable – after all, we opened them about $150 higher).
The next interim target for gold is at about $1,120 and the final one is at about the $1,000 level.
Not much changed in the silver market – the white metal moved lower, but it’s not underperforming gold to a meaningful extent. Please recall that silver’s sharp underperformance is something that we want to see as a confirmation that the final bottom is in.
Moving back to gold, we see that the Dow to gold ratio pulled back after the recent breakout, but didn’t invalidate it. Consequently, the ratio is still likely to move visibly higher and gold visibly lower.
We previously commented on silver stocks in the following way:
Silver miners broke below their 2014 lows, which is a major bearish development. The breakdown is not confirmed („the dam is not broken“), but the first and most important step was just made („there’s a crack in the concrete“). Will other parts of the precious metals sector follow? Most likely, even if that doesn’t happen right away.
Silver miners rallied on Wednesday, but is this really a bullish development? Not really. The move only took silver stocks to the previously broken low – not above it. Consequently, there was no invalidation. If silver miners continue to move lower, we will have a confirmed breakdown. If silver stocks move higher, the breakdown will be invalidated and we will have bullish implications (and likely a short-term rally in the following days). Which is more likely? The former, as we are after a breakdown and in a downtrend. The more important thing here is that even if we see some strength, it's not likely to be very significant.
The HUI Index moved higher yesterday, but this move didn’t change anything from the long-term perspective.
Our yesterday’s comments remain up-to-date:
Gold stocks plunged sharply on Friday and are now well below their 2013 lows. It seems that they are back in the decline mode and their previous outperformance was indeed a very temporary phenomenon, as we expected. Once miners move below their 2008 and 2014 lows at about 150, we’ll likely see a slide below 120, perhaps even (very temporarily) below 100. Our target area in this range remains up-to-date.
On a short-term basis, we see that the GDX ETF reversed and closed higher than on the previous day. That seems bullish given gold’s decline and lack of strength in the general stock market, but let’s not forget about the volume. The volume should have been very high if this was a major turnaround – and it was rather similar to what we’d seen in the previous few days (even lower than the average volume in the previous 3 trading days). Consequently, the bullish reversal is much less bullish than it seems at the first sight. We could see a move higher here, but it’s likely not the end of the decline and another downswing would likely follow - if we see an upswing here that is.
Was there any reason for mining stocks to rally against gold?
The gold stocks to gold ratio reached its 2000 low, which is a quite good reason for a bounce. The implications are still bearish as the trend remains down, and the above chart simply shows that it wasn’t necessarily the “internal strength” of the mining stocks that pushed them higher, but perhaps yesterday’s rally was simply a reaction to reaching a support level.
Overall, yesterday’s session didn’t change much and we can summarize the current situation in the same way as we did yesterday:
Summing up, the precious metals sector moved much lower on Friday and it seems that it was another step in the current true direction of the market. We are likely to see a small corrective upswing here, but it doesn’t seem that we will see a more visible correction until we see gold close to its 2014 low. Gold stocks are now once again underperforming gold, which serves as a confirmation that the correction is over and the decline will now continue.
Even though the size of the profits on the current short position may suggest that’s it’s worth taking them off the table (we opened the short position on Jan. 23 when gold was at about $1,300), it seems that the risk/reward ratio still favors keeping the position open as it doesn’t seem that the decline is over. Even though gold has already fallen significantly, it’s still likely to decline even more in the coming weeks and it is this outlook that makes us think that the short position remains justified at this time.
As always, we’ll keep you – our subscribers – informed.
To summarize:
Trading capital (our opinion): Short positions (full) in gold, silver and mining stocks with the following stop-loss orders and initial (!) target prices:
- Gold: initial target level: $1,135; stop-loss: $1,234, initial target level for the DGLD ETN: $85.48; stop loss for the DGLD ETN $65.45
- Silver: initial target level: $15.10; stop-loss: $17.23, initial target level for the DSLV ETN: $74.05; stop loss for DSLV ETN $48.36
- Mining stocks (price levels for the GDX ETN): initial target level: $17.13; stop-loss: $21.17, initial target level for the DUST ETN: $23.49; stop loss for the DUST ETN $11.35
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 level: $22.13; stop-loss: $27.38
- JDST: initial target level: $14.58; stop-loss: $7.10
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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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief
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