Briefly: In our opinion speculative short positions (full) are currently justified from the risk/reward point of view.
The precious metals sector moved lower yesterday and that was particularly interesting because in the previous days gold declined along with the USD Index and yesterday the USD Index moved higher. It seems that currently gold is declining no matter what the USD Index does. What are the implications?
Naturally, the implications are bearish. In yesterday’s alert we wrote: The implications [of the possible decline in the USD Index] 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.
Is the regular negative correlation between gold and the USD Index back for good? It’s too early to say so, but whether this is the case or not doesn’t change the most important thing – that the implications for the precious metals are bearish either way. If the regular gold-USD link is not back yet, then it doesn’t really matter as the technical situation in gold is bearish and the possibility of seeing lower values of the USD Index doesn’t change much, if anything. On the other hand, if gold is going to react negatively to the USD’s rally, then the implications are still bearish as the outlook for the USD is bullish despite the possibility of a short-term downswing.
Let’s take a closer look at the charts (charts courtesy of http://stockcharts.com).
Gold declined substantially and the decline was preceded by a major reversal (last Thursday) and a sell signal from the Stochastic indicator, and all these factors paint a bearish picture for gold in the coming weeks. Moreover, gold declined below the initial – 38.2% - Fibonacci retracement level, which is another bearish development.
The silver and mining stocks’ decline was not as spectacular, but we can attribute that to rising stock prices, which can give a temporary boost to these parts of the precious metals sectors (silver has multiple industrial uses and is therefore more connected to the companies’ profits and thus their stock prices, and mining stocks are – well, they are also stocks). Consequently, we don’t find the bad but relatively good (compared to gold) performance of silver and mining stocks bullish.
The USD Index rallied after moving to the previous June lows, but it didn’t erase the entire Monday’s decline. Silver and mining stocks did, even despite the move higher in the general stock market, so the overall performance of the former is still bearish.
As far as the USD Index is concerned, our yesterday’s points remain up-to-date – we can still see a move lower in the short term, but it’s not likely to be anything more than a temporary downswing. The outlook remains bullish.
Before summarizing, we would like to say (as we received a few questions about it yesterday) that as far as the timing of the next bottoms in the precious metals is concerned, you will find details on the long-term gold chart, for instance in Monday’s alert. $1,000 in gold seems probable (at the moment of writing these words) around September – October and lower gold values could be seen in the winter. We will keep you updated as the situation develops.
Summing up, the outlook for the precious metals remains bearish and yesterday’s slide seems to confirm it.
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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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager
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