Gold & Silver Trading Alert: Trump Wins – PM’s Reaction and Implications

tools spotlight

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

Donald Trump won the U.S. presidential election and the initial reaction of the precious metals market was very positive – gold and silver soared. The “problem” is that the initial reaction was mostly invalidated only a few hours after the outcome of the elections became known. What’s next?

In yesterday’s alert, we wrote the following:

As we are right before the U.S. elections, we need to note that we could see increased volatility in the market but… This doesn’t have to be the case. The polls are still close to a tie and they are publicly known, thus there will likely be little surprise just before the election. In the case of the Brexit vote, there was a huge surprise, as Bremain was the very likely outcome and the markets were surprised, to say the least. In this case, the market is not likely to be surprised as it has to take into account that both Trump and Clinton could really become the next U.S. President.

What will definitely happen after the elections? The uncertainty regarding the choice will be gone and this is much more certain than Trump’s victory which could (doesn’t have to) contribute to gold’s temporary (!) upswing. Consequently, even if Trump wins, the effect of lower uncertainty could outweigh the effect of bigger uncertainty related to him being the anti-establishment candidate. Therefore, we think that the best approach is to look at what the charts are saying and position oneself accordingly, while keeping the size of the position reasonable. If one is particularly risk averse, they might consider limiting the size of the position or even closing the position entirely temporarily (the positions are profitable, especially in mining stocks).

Trump has indeed won and it seems that both of the mentioned effects came into play. Gold and silver rallied substantially initially, but they didn’t rally to $1,500 or $1,400 as many predicted. Gold and silver rallied only very temporarily above their resistance levels (61.8% Fibonacci retracement level in the case of gold and the $19 level in the case of silver) and – more importantly – they declined shortly after the outcome of the elections became clear. Gold didn’t even rally above the post-Brexit high. At the moment of writing these words, gold is back below $1,300 and silver is up by only $0.35. Clearly that’s not much given the presidency of the anti-establishment candidate. What’s next?

With the big uncertainty behind us, it’s likely that the previous trends will now resume. In fact, it seems that we already see it taking place. The precious metals market soared when the uncertainty regarding the outcome of the U.S. Presidential elections was at the highest and once the outcome was known, it started to decline.

In the case of the USD Index, resuming the trend means moving up and in the case of the precious metals sector it means moving down. Naturally, it could take metals and miners a few extra days to cool down before the trend is resumed, but what we saw based on the reaction to the outcome of the U.S. presidential election doesn’t appear to be a game-changer.

Before moving further into the charts territory, we would like to discuss whether it was clear that Trump was likely to win and that gold would rally in today’s pre-market action. Of course not. It’s only clear today – after the outcome is known. Yesterday, it was more like a 50/50 situation and since the trend in gold is down, if Clinton had won, we would likely have woken up to gold at a discount ($50+) that would (contrary to today’s pre-market upswing) have likely not been invalidated (at least not to the extent the current rally is). Since trading is a game of probabilities, we had a situation in which a big decline that would likely not be erased was just as likely as a temporary upswing – and all within a bigger downswing. Therefore, the risk to reward indeed favored short positions in the PM sector. What happened? Gold moved a bit above our stop-loss level (on a side note, we are often asked why our stop-loss levels are relatively far from the current price – today you can see that they were not far enough from the price), so one-third of our speculative short position may have been closed (if the instrument that one is using is trading overnight, then yes, it was closed, and if it doesn’t, like the ETFs, then it was not). Two thirds - silver and miners - remain intact. The question is what to do with gold now, if the position was closed. Based on the above (the reaction to the U.S. presidential elections), the outlook didn’t change, so the short position in gold remains justified from the risk to reward point of view (and so does re-entering the position). We will move the stop-loss levels for gold and silver higher as today’s pre-market highs serve as new, additional resistance levels.

Having said that, let’s take a look at the charts (charts courtesy of http://stockcharts.com).

Short-term Gold price chart - Gold spot price

Gold moved to about $1,338 today – above the 61.8% Fibonacci retracement level, but since this move was quickly invalidated, it didn’t change much. We can’t say if the sell signal from the Stochastic indicator will be invalidated based on today’s session, but it probably won’t and overall much less will change than it seemed to change after Trump’s victory.

If gold closes the day below $1,294 (the 38.2% Fibonacci retracement) it will serve as a bearish confirmation. If gold closes above it, but still below $1,326, today’s session will likely have little implications. If we see a close above this level, it could mean that we are going to see an additional short-term upswing before the downtrend resumes.

Long-term Silver price chart - Silver spot price

Short-term Silver price chart - Silver spot price

Silver outperformed gold yesterday and the implications thereof were bearish. In today’s trading, we saw that silver moved to about $19, after which it retraced once again below $18.80. Silver retraced more than gold and this kind of outperformance is a bearish sign.

Moreover, please note that on the long-term chart it’s visible that silver moved back and forth in early 2013 before taking a dive. Consequently, today’s upswing is not really something that makes this situation different than what we saw back in 2013.

GDX - Market Vectors Gold Miners - Gold mining stocks

Yesterday’s decline in miners is bearish, but let’s discuss what may happen today. At the moment of writing these words, GDX is at $25.10 in the pre-market trading. This is below the previous November high and below the 38.2% Fibonacci retracement level. Therefore, mining stocks continue to underperform metals and this remains to be a bearish sign. Since we don’t have today’s closing prices, there’s not much more that we can say at this time about the miners.

Before summarizing, let’s take a look at the USD Index.

Short-term US Dollar price chart - USD

In Monday’s alert we featured the red target area and we wrote the following:

The USD Index declined on Friday, which makes gold’s tiny upswing bearish (the reaction was weak) and a decline in miners even more bearish. Since the reaction to USD’s movement weakened, it doesn’t seem that metals and miners would rally substantially even if the USD’s bottom is not yet in. Speaking of a bottom for the USD Index – it still seems most likely that it’s either in or very close to being in (either at 97 or at 96.50), but if it’s not, then it’s still very unlikely that it would slide below the 96 level and confirm such a breakdown – multiple support levels coincide there.

In today’s pre-market trading, the USD Index moved right into our target area (declining a bit below 96) and quickly reversed – at the moment of writing these words, it’s trading at about 97.97 – above yesterday’s closing prices, so it erased the entire decline. Therefore, we have not only seen a huge daily reversal (with bullish implications), but also a verification of the move above the declining medium-term red support/resistance line (verified as support). It all happened right before the cyclical turning point, so the implications are even more bullish. This has bearish implications for the precious metals sector for the following weeks and months (although the next few days could still be somewhat chaotic).

Summing up, the precious metals market moved higher due to Donald Trump’s victory, but a large part of the pre-market rally was erased and it could be the case (especially based on the level reached by the USD Index and its profound reversal) that the rally is already over. The uncertainty has most likely peaked and thus it’s quite likely that the same is the case for the precious metals sector. While we don’t have today’s closing prices yet (or even the opening prices), we can’t exactly say how much will really change on the charts based on today’s session, but implications based on yesterday’s closing prices were bearish and it doesn’t seem (based on what we’ve seen so far) that today’s session will change anything.

If today’s session provides us with additional bearish signs, we will consider opening an extra-large short position (at this moment the public hates the USD and loves gold due to the result of the elections, while in reality much less changed and once we get the technical confirmation the risk to reward ratio will likely be even more favorable).

Since gold moved to a new intra-day high today, we are moving the stop-loss levels a big above it (also applies to silver). As always – we will keep you – our subscribers – updated.

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): Short positions (100% of the full position) in gold, silver and mining stocks are justified from the risk/reward perspective with the following entry prices, stop-loss orders and initial target price levels:

Gold: initial target price: $1,006; stop-loss: $1,354, initial target price for the DGLD ETN: $73.19; stop-loss for the DGLD ETN $39.87
Silver: initial target price: $13.12; stop-loss: $19.33, initial target price for the DSLV ETN: $39.78; stop-loss for the DSLV ETN $18.44
Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $27.32, initial target price for the DUST ETF: $297; stop-loss for the DUST ETF $27.87

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: $47.41
JDST ETF: initial target price: $245; stop-loss: $18.59

Long-term capital (core part of the portfolio; our opinion): No positions

Insurance capital (core part of the portfolio; 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 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.

=====

Hand-picked precious-metals-related links:

Gold tempers initial surge as Trump takes White House

Gold Approaches Busiest Trading Day Ever After Trump’s Victory

=====

In other news:

December Fed Rate-Hike Odds Fall Below 50% as Trump Leads Polls

World in shock as Trump surges to victory in U.S.

After Trump and Brexit, populist tsunami threatens European mainstream

‘Brexit Plus’ Isn’t So Far-Fetched Now

Markets reassured by Trump victory speech after initial losses - live updates

India just made a crazy move with its money — imagine the US pulling the $100 bill