Briefly: In our opinion, short (full) speculative positions in gold, silver and mining stocks are justified from the risk/reward point of view.
Gold did not plunge yesterday, but it didn’t move back up as well. Given the levels that were reached, the above is quite significant, even though there were no new lows in the case of the yellow metal. Will gold drop even further?
In short, this seems quite likely. Gold didn’t move back up yesterday, which suggests (not proves, though) that last week’s slide was not accidental – there was no rally even though the USD Index declined a bit. If gold was waiting for a slightest positive signal (and was really in the bullish mode), it would have rallied based on the very small decline in the USD – but it didn’t. Gold was and still is below the $1,100 level and this level could not prevent gold from sliding further this time. It doesn’t seem likely that the decline is over.
Let’s move right to the charts (charts courtesy of http://stockcharts.com).
Gold’s long-term chart (along with many other charts) remains unchanged since yesterday, so if you haven’t had the chance to do so previously, we encourage you to read our yesterday’s alert. Having said that, let’s take a look at gold’s short-term chart.
On the above chart we see that gold moved insignificantly higher and on volume that was lower than what we had seen during previous daily declines. Gold simply paused – there are no signs that the decline has just ended.
Some might say that the Stochastic indicator flashed a buy signal, but we would like to remind you that the daily version of this indicator – contrary to the weekly version – is not particularly reliable, especially when it comes to discussing buy signals. We saw similar signals in late June 2015, mid-February 2015, August and September 2014 and they were followed by much lower prices, not meaningful rallies. Gold could move a bit higher here or trade sideways before declining once again, but the Stochastic indicator doesn’t say that such a move would be very probable.
The implications of our yesterday’s comments on silver remain up-to-date:
Silver moved back below the declining red line, which is a bearish development that makes subsequent declines even more likely. That’s the only new thing that we can say about the above chart, but that doesn’t mean that it’s not important – conversely, the above is a major bearish development.
Thanks to yesterday’s decline, silver is even more visibly below the mentioned red line, which has bearish implications.
On the short-term silver chart we see that the vast majority of the October rally was already erased. Will the decline continue further? That’s quite likely. Silver broke below the rising short-term support lines and closed the week below them. The breakdowns were not confirmed, but still, they were present. The short-term outlook was and still is bearish.
The above comments remain up-to-date – the situation even deteriorated a bit as silver moved further below the rising short-term support lines. The accompanying volume was sizable, so the breakdowns are likely very close to being confirmed, which will make the outlook even more bearish for the medium term.
Mining stocks moved higher yesterday and some may say that it’s a bullish phenomenon – but is it?
Not likely. Gold stocks simply continue to decline at the pace at which they declined previously. They got a little ahead of themselves last week, so this week’s move higher is not surprising and doesn’t invalidate anything. In yesterday’s alert we wrote the following:
Gold stocks declined substantially (more than 10%) last week and at this time it’s rather clear that the recent rally was nothing more than just a bounce. Is the decline over? We wouldn’t be surprised if the decline paused close to the 100 level, but it doesn’t seem that the decline will end there. We just saw a major sell signal from the Stochastic indicator and based on the previous implications of this signal (since early 2011), it seems that the next big move down is just starting – not ending.
Will gold stocks rally significantly from the 100 level? That’s not likely based on the information that we have today. This level has already triggered a sizable bounce and those who were waiting for 100 to be reached or almost reached, have likely already entered the market. Consequently, this time, there might not be strong buying power preventing gold miners from sliding further. Consequently, we will likely not close the current short position at those levels (unless we see bullish confirmations that is – in this case, we’ll likely want to secure profits and re-enter the short positions once the situation clarifies).
Could mining stocks correct some more here? Yes, a move to $14.60 or so in the GDX (to the previously broken rising support/resistance line and the September high) is not out of the question, but it doesn’t mean that it’s likely or worth betting on. There are multiple bearish signs present and even if we are about to see a small corrective upswing, it seems that keeping the short positions intact remains justified from the risk/reward point of view.
Summing up, the medium-term decline in the precious metals sector continues and there are multiple signs that confirm this bearish outlook (including the outlook for the USD Index). We could (and are in fact likely to) see some sort of corrective upswing eventually (perhaps this week), but when that happens, it’s not likely that the move higher would be significant or long-lasting. There is a good chance that the next wave down will be very sharp and even if one exits the short position now, re-entering it at more favorable levels might be difficult. In our opinion, the current short position continues to be justified from the risk to reward point of view and it seems likely that it will further increase our profitability.
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: $1,167, initial target price for the DGLD ETN: $98.37; stop loss for the DGLD ETN $71.04
- Silver: initial target price: $12.60; stop-loss: $16.73, initial target price for the DSLV ETN: $96.67; stop loss for DSLV ETN $40.28
- Mining stocks (price levels for the GDX ETF): initial target price: $11.57; stop-loss: $18.13, initial target price for the DUST ETF: $26.61; stop loss for the DUST ETF $9.22
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: $25.23
- JDST ETF: initial target price: $46.47; stop-loss: $15.58
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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