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

Gold broke below the previous 2015 low (in terms of daily closing prices) and we saw a major breakdown in silver (in terms for weekly closing prices) and these are both important bearish developments. However, mining stocks seem to be showing strength by not declining despite declines in gold and silver. Will the breakdowns be invalidated?

In our opinion the more likely scenario is that they will not be invalidated (or the invalidation will be only very temporary and the decline will continue shortly), however, we want to be prepared also for the less likely outcome in which the precious metals sector corrects once again before sliding to $1,000 or so.

Before discussing the strategy, let’s take a look at the charts (charts courtesy of http://stockcharts.com).

Gold closed below the previous lowest close of the year – we saw a breakdown. That’s a bearish development, but it’s not very bearish, because the breakdown is not confirmed yet – the move below the previous low is very small and it was just one close below this level. So, while the breakdown itself is a bearish event, we need to remember that if it is invalidated, the invalidation itself will serve as a short-term buy signal that could take gold visibly higher (to the 38.2% - 61.8% Fibonacci retracement levels, which are approximately at $1,118 and $1,146). When would the breakdown be truly invalidated? Technically, as soon as gold moves a bit above the broken low, but we think it’s better to take into account some possible random movement on a very short-term basis and focus on the $1,100 level instead. Conservatively, we’ll view not the $1,100 level as critical, but a few dollars higher – we think that $1,103 is appropriate in this case.

Consequently, while at this time the continuation of the decline is probable even if gold moves above $1,103, the chance for a bigger corrective upswing would become too big to continue to remain on the short side of the precious metals market if such a move materializes. That’s why we moved the stop-loss level to $1,103. Actually, that’s not a stop-loss level, but effectively a take-profit level, as we entered this short position when gold was trading at about $1,150, so closing it at $1,103 does not result in a loss, but a profit.

Our Friday’s comments on the above chart remain up-to-date:

From the long-term perspective, we see that the RSI is not indicating an oversold condition and that the major sell signal from the weekly Stochastic indicator (which proved to be very reliable in the past years) remains in place. The short-term picture, however, remains rather blurry based on the above charts even though the medium-term trend remains clearly down.

In Friday’s alert we wrote the following:

The long-term picture, however, is likely about to feature a major bearish sign – the breakdown in terms of weekly closing prices. The week is not over, but silver is already visibly below the previous weekly low ($14.55). All it takes for silver to flash this major sell signal is to do nothing. Unless silver rallies visibly, we will see a major breakdown not only below the previous 2015 low, but also a visible breakdown below the 2010 low.

Silver indeed closed the week well below the previous weekly low – at $14.23. The last time that silver closed the week below this level was in August 2009 (when silver closed the week at $14.16). Silver’s weekly breakdown is significant not only because of the technical definition of breakdowns and the importance of weekly prices, but also because of what happened last time when silver broke down like that – a little over a year ago silver broke below the previous analogous low. It turned out that the sizable rally that had preceded the breakdown was actually less than the half of the entire decline. If we see the same thing also this time, silver could go below the $12 level.

What about mining stocks?

Miners have been moving back and forth in the last few days and they broke above their short-term resistance line yesterday and they managed to do so in spite of the declines in gold and the general stock market. That’s a bullish piece of news (only for the short term, though), but not very bullish given that all of that happened on relatively low volume. The price-volume link still favors lower prices as miners decline on bigger volume and move higher on lower volume.

As you can see on the above long-term HUI Index chart, the outlook for the medium term remains bearish. Gold stocks already corrected 2 times after moving to the 100 level (so the natural post-plunge bounce scenario does no longer apply here) and miners are after a major sell signal from the weekly Stochastic indicator (which has been extremely reliable for years).

The medium-term trend remains down but the above charts don’t tell us much about the very short-term outlook.

Summing up, as you can see, the short-term outlook improved a bit for the precious metals sector, but in our opinion it didn’t improve significantly enough to make us close the existing speculative short positions – the main move is likely to the downside and that’s the move that we want to profit on (it seems much less risky and more profitable than betting on very short-term price swings).

However, if (!) the precious metals sector moves a bit higher (gold moving above $1,103), the short-term outlook will change and it will no longer be justified to keep the short positions intact. Consequently, last week, we moved our stop-loss levels lower. We are making no adjustments regarding the long-term investment capital – we’re staying out of the precious metals market with it for now.

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

To summarize:

Trading capital (our opinion): Short position (full) position in gold, silver and mining stocks is justified from the risk/reward perspective with the following stop-loss orders and initial (! – this means that reaching them doesn’t automatically close the position) target prices:

• Gold: initial target price: $1,050; stop-loss: $1,103, initial target price for the DGLD ETN: $98.37; stop loss for the DGLD ETN $85.51
• Silver: initial target price: $12.60; stop-loss: $14.73, initial target price for the DSLV ETN: $96.67; stop loss for DSLV ETN $61.00
• Mining stocks (price levels for the GDX ETF): initial target price: $11.57; stop-loss: $14.23, initial target price for the DUST ETF: $26.61; stop loss for the DUST ETF $17.55

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: $16.27; stop-loss: $20.03
• JDST ETF: initial target price: $46.47; stop-loss: $29.71

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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Thank you.

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

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