Gold & Silver Trading Alert: U.S. Dollar’s Slide and Its Implications

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Briefly: In our opinion speculative short positions (full) are currently justified from the risk/reward point of view.

We’ve seen a lot of back and forth action in the precious metals market this week, but the moves in the USD Index were much more decisive and that’s what we’d like to discuss in today’s alert. Besides, since nothing really changed yesterday in gold, silver and mining stocks, our yesterday’s alert remains up-to-date.

Let’s take a closer look (charts courtesy of http://stockcharts.com).

Short-term US Dollar price chart - USD

The USD Index declined on Friday as well, but the real decline was seen yesterday. How much did it change? Not much – the 61.8% Fibonacci retracement was not touched, let alone broken and since this level stopped the decline earlier this month, we don’t think the situation really changed.

In fact, even if the USD Index declined a bit below its previous June low, it would still not change much as the May 2015 low provides support. Additionally, a decline to the May 2015 low would make the current decline similar to the one seen in early June, thus creating a zig-zag pattern, after which a rebound would be even more likely.

Long-term US Dollar price chart - USD

Why? Because the long-term support levels are once again very close. Completing the above zig-zag would mean a move to the upper part of the previously broken trend channel, which is another reason to expect a rebound. If the rebound doesn’t happen there, the USD Index is still not likely to break below the previous 2016 low as that’s a multi-year support that has already been verified twice. Consequently, even though we could see some weakness in the USD Index on a short-term basis, it’s likely to be followed by much more significant rallies and the overall implications for the precious metals market are bearish.

Let’s keep in mind that the size of the move that follows a consolidation is likely to be similar to the one preceding it and this analogy provides us with a target at about 118. There is also a tendency for the initial move after a breakout from the consolidation to be more or less equal to the size of the consolidation (in terms of price) and this gives us a target of about 109. Both targets are much higher and would likely correspond to lower gold prices.

Summing up, not much changed in the precious metals market yesterday, but the USD Index declined substantially. The implications are not bullish for the precious metals sector due to the increased tensions before the Brexit poll as the usual gold-USD link doesn’t work normally. The link is most likely going to be back in place shortly and the long-term chart for the USD Index suggests much higher values of the latter (and lower values of gold) even though we could see lower USD values this week.

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

To summarize:

Trading capital (our opinion): Short positions (full position) 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: $1,006; stop-loss: $1,323, initial target price for the DGLD ETN: $86.30; stop-loss for the DGLD ETN $44.35
Silver: initial target price: $12.13; stop-loss: $18.17, initial target price for the DSLV ETN: $65.88; stop-loss for the DSLV ETN $24.16
Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $27.47, initial target price for the DUST ETF: $47.90; stop-loss for the DUST ETF $8.50

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: $41.73
JDST ETF: initial target price: $61.74; stop-loss: $9.87

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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