Briefly: In our opinion, full speculative short positions in gold, silver and mining stocks are justified from the risk/reward point of view.

Gold declined earlier this week and this was the case early in yesterday’s session, but finally gold managed to close higher than on the previous trading day and it moved higher in today’s pre-market trading. What are the implications?

In our opinion, not much changed yesterday and today’s session doesn’t change that much either. The USD Index didn’t move to new lows and closed lower than yesterday and we saw a reflection of that in gold – the latter didn’t move to new highs on an intra-day basis, but it closed above the previous close. Did it change anything? No. Let’s take a look at the details (charts courtesy of http://stockcharts.com).

Gold moved higher in terms of daily closing prices, but not in terms of intra-day highs. Moreover, the volume was relatively low, so it seems that this is a part of a topping process and not a continuation of the previous rally. The important thing is that gold’s reaction was a mirror reflection of what happened in the USD Index and the latter simply moved to (and closed very close to it) the major declining support line without breaking below it. It suggests a turnaround in the USD Index and the implications for gold are bearish – and yesterday’s volume confirms this outlook.

In light of today’s pre-market upswing, the next resistance is at about $1,230 – a move to this level wouldn’t really invalidate the bearish outlook because that’s still relatively close to the 60-week moving average, when viewed from the long-term perspective.

Silver has barely moved yesterday, so our yesterday’s comments remain up-to-date:

Silver moved temporarily above the mentioned level (to $15.48) and it declined and closed below it (at $15.32) shortly thereafter. Consequently, the top may already be in.

We saw a similar kind of performance once again yesterday. Despite an intra-day attempt to move higher, silver reversed and ended the session lower than the previous day’s close. The implications are bearish.

Silver is not moving much higher in today’s pre-market trading – it doesn’t seem to be willing to break much higher.

As far as gold stocks are concerned, we previously wrote the following:

The HUI Index declined further and ended the session well below the 150 level – the breakout above it was just invalidated. This is yet another bearish signal that we just saw – perhaps the most bearish one. Gold stocks moved up right after the session was opened, which allowed to get good prices for the short positions and the HUI was still above the opening price when we sent out the second alert in which we wrote about doubling the size of the short position (gold was at about $1,198 and silver was at about $14.45 at that time).

The HUI Index moved a bit higher yesterday, but it didn’t move back above the 150 level (the 2008 low), so the bearish implications of the above comments remain up-to-date.

Moreover, the GDX ETF moved a bit higher (39 cents) and the over higher materialized on relatively low volume (a volume this low was not seen since the first days of this month). This suggests that yesterday’s upswing was just a temporary pause and not a beginning of another meaningful move higher.

Summing up, the situation in the precious metals market deteriorated based on Tuesday’s price action in gold, silver, mining stocks and the USD Index and Wednesday’s price action (as well as today’s pre-market move to $1,220 – which is the price at the moment of writing these words) didn’t change much.

The USD Index seems to have bottomed (and Wednesday’s decline and today’s small move back below 96.7 doesn’t invalidate it –the USD Index is at 95.56 at the moment of writing these words), but the most important thing is that the precious metals sector declined even despite a move lower in the USD on Tuesday. Gold stocks invalidated their move above the 2008 low and overall the outlook became even more bearish.

Today’s rally in gold can be likely attributed to the assumption that USD is breaking below its key support line, which hasn’t really happened – a tiny move below the support line is very far from being confirmed and the implications remain as they were – bullish for the USD Index and bearish for the precious metals sector.

Consequently, we think that full speculative short positions are currently justified from the risk/reward perspective.

As always, we will keep you – our subscribers – updated. If the outlook changes based on today’s price moves, we will send out another alert.

To summarize:

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

• Gold: initial target price: $973; stop-loss: $1,242, initial target price for the DGLD ETN: $100.97; stop-loss for the DGLD ETN $56.67
• Silver: initial target price: $12.13; stop-loss: $15.82, initial target price for the DSLV ETN: $80.81; stop-loss for DSLV ETN $44.87
• Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $18.91, initial target price for the DUST ETF: $17.31; stop-loss for the DUST ETF $5.05

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: $24.33
• JDST ETF: initial target price: $36.46; stop-loss: $12.39

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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Hand-picked precious-metals-related links:

Central banks and Chinese buyers helping to spur gold demand -WGC

Canada sells nearly half of all its gold reserves

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In other news:

Yen, bonds, gold all gain at dollar's expense, stocks sag

Yellen - Fed not likely to reverse course on rates despite risks

JPM's Striking Forecast: ECB Could Cut Rates To -4.5%; BOJ To -3.45%; Fed To -1.3%

Germany's Slumping DAX Needs More Than a Deutsche Bank Rebound

BP CEO ‘Very Bearish’ on Oil as Storage Tanks Are Filling Up

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Thank you.

Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief

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