Briefly: In our opinion, full (150% of the regular full position) speculative short positions in gold, silver and mining stocks are justified from the risk/reward perspective at the moment of publishing this alert.
Gold, silver and (especially) mining stocks moved only a little yesterday and the most visible action took place in the USD Index. The latter declined even below the 98 level and the question is if the implications are really as profoundly bullish for PMs as it may seem at first sight.
Let’s take a closer look at the USD’s chart (charts courtesy of http://stockcharts.com).
From the long-term (i.e. the most important one) point of view, we saw a small breakdown below the rising red support line and the 50-week moving average. The USD Index didn’t move below the 50% Fibonacci retracement based on the 2016 – 2017 rally. The retracement is at about 97.75 and today’s low (so far) is 97.864 – very close to the retracement and its proximity could have already worked as strong support (Fibonacci retracements and extensions tend to work very well in the forex market).
The key question is if the breakdown below the rising support line and the moving average can be trusted. In our view, they are still unconfirmed – there was no weekly close below them and they declined sharply right on the turning point date, which by itself makes a big reversal likely. Such a reversal could easily translate into an invalidation of the breakdowns and a strong buy signal. In fact, that’s the likely outcome.
However, the above is not the most important signal that we just saw. The most important issue is the metals’ strength of reaction. The USD Index just moved to new yearly lows and this should have triggered a substantial rally in the precious metals along with mining stocks outperformance… Unless the precious metals market is no longer willing to react to bullish signals as the corrective rally is practically over and all the market wants to see, and to what it wants to react, is a bearish signal.
So, how did PMs react?
Gold was up by $6, silver was up by 14 cents (still no close above the nearby resistance levels) and the GDX moved higher by 16 cents on low volume. That’s a very weak reaction, which emphasizes that the trend in the precious metals market remains down and that any upswings here should be viewed as temporary corrections.
Gold’s upswing is barely visible compared to the April – May decline, even including today’s pre-market upswing.
Silver remains below the resistance levels: the March lows and the 61.8% Fibonacci retracement level, so technically nothing changed based on yesterday’s price change.
The same goes for the mining stocks. The HUI Index didn’t invalidate the breakdown below the key rising blue resistance line – even though the USD Index declined so significantly and thus the outlook didn’t become more bullish than it had been previously – if any change is to be discussed, then it would be an increase in the bearishness due to the miners’ lack of reaction to the USD’s daily slide.
Summing up, the outlook for the precious metals market remains bearish and the very weak reaction to the USD’s daily slide serves as a bearish sign even though the latter may appear as something bullish for PMs. As always, we will keep you – our subscribers – informed.
To summarize:
Trading capital (supplementary part of the portfolio; our opinion): Short positions (150% of the 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 / profit-take orders:
- Gold: exit-profit-take level: $1,063; stop-loss: $1,317; initial target price for the DGLD ETN: $81.88; stop-loss for the DGLD ETN $44.57
- Silver: initial target price: $13.12; stop-loss: $19.22; initial target price for the DSLV ETN: $46.18; stop-loss for the DSLV ETN $17.93
- Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $26.34; initial target price for the DUST ETF: $143.56; stop-loss for the DUST ETF $21.37
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: $45.31
- JDST ETF: initial target price: $417.04; stop-loss: $43.12
Long-term capital (core part of the portfolio; our opinion): No positions (in other words: cash)
Insurance capital (core part of the portfolio; our opinion): Full position
Please note that the in the trading section we describe the situation for the day that the alert is posted. In other words, it we are writing about a speculative position, it means that it is up-to-date on the day it was posted. We are also featuring the initial target prices, so that you can decide whether keeping a position on a given day is something that is in tune with your approach (some moves are too small for medium-term traders and some might appear too big for day-traders).
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.
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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager
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