Briefly: In our opinion no speculative short positions in gold, silver and mining stocks are currently justified from the risk/reward perspective.
Gold closed the previous session more or less where it had closed in the previous days, but something much more significant happened in the USD Index. The U.S. currency moved above the previous December high. Will this breakout make gold plunge any day now?
In short, it’s too early to say that this will indeed be the case. Let’s take a look at the breakout (charts courtesy of http://stockcharts.com).
The “problem” with the breakout is that it was very small. It’s not confirmed and thus we can’t really discuss its implications at this time. While the move itself is a positive sign, it’s not very important at this time.
Please note that so far the USD Index has moved up in tune with the red dashed line that is based on the pre-consolidation rally.
Our comments from Wednesday’s Forex Trading Alert remain up-to-date:
Please note that the November – early December period could be viewed as a rising form of consolidation. The rally didn’t end and there was no big correction after the late-October rally. Instead, we saw USD Index trading sideways. Keeping the above in mind, one can expect the move that is about to take place – after the end of the consolidation – to be rather similar to the move that preceded it. This means that we could see the USD Index a few index point higher relatively soon. The long-term chart tells us that the next strong resistance is close to 92, so this is where the next stop or pause or top could be seen.
While the USD Index moved indeed higher, it has yet to break out above the previous highs and the 90 level before 92 becomes a very probable target.
In the past few alerts we have been writing that one of the things that could make the outlook for gold much more bearish was its ability to decline regardless of what was going on in the USD Index.
We saw daily declines in gold and the USD Index and gold’s underperformance in general, but in the last 2 days we once again saw gold’s strength. The yellow metal didn’t decline much, even though the USD Index moved visibly higher. Perhaps traders and investors are waiting for the USD to break out in a more significant way in order to push the sell button on their gold positions.
At this time the gold-USD link remains unclear.
As far as gold itself is concerned, nothing changed from the medium-term perspective, so our previous comments remain up-to-date:
Let’s keep in mind that gold remains in a medium-term downtrend and could move even higher in the short term (to $1,250 or so) and still remain in it. In other words, another short-term rally here would not invalidate the bearish medium-term outlook.
The short-term situation also remains unchanged (gold’s yesterday’s pre-market rally and the subsequent decline didn’t change anything) and our previous comments are still up-to-date:
The price of the yellow metal declined slightly below the 38.2% Fibonacci retracement level based on the short-term rally. This is more or less where gold corrected in late January 2014 before rallying quite sharply. Since the previous declines (marked with green) were similar in terms of shape, we could see a similar rally also here, if this self-similarity pattern continues.
Today’s rally in gold seems to confirm that the above pattern remains in place and the implications remain bullish.
Gold declined after we wrote the above, but since it’s not below the previous lows, the shape of the price moves is still similar to what we saw in January. Consequently, we could still see a rally in the coming days / weeks based on the above alone.
The move higher that we saw yesterday seems bullish if we compare it to the move in the USD Index, but it seems bearish if we compare it to the size of the volume, which was low. The situation is simply unclear at this time as far as short-term is concerned.
We have the same – mixed – signals in mining stocks. Miners rallied visibly yesterday, but the volume was relatively normal, so it didn’t provide a bullish confirmation. The general stock market moved sharply higher yesterday, which is the likely reason behind the miners’ rally. Consequently, their daily outperformance doesn’t necessarily imply strength in the precious metals sector.
Overall, the last several weeks of trading seem to be a consolidation after a big decline and a verification of the breakdown below the 2013 lows. The medium-term outlook remains bearish, but the short-term one is unclear.
The situation in the various ratios (silver stocks to silver, gold stocks to gold) and in the bond market continues to have bearish implications for the precious metals market (as described in previous alerts), and since not much changed yesterday (the breakout in the USD Index is too small to change anything), we can summarize the situation in the precious metals market similarly as we did yesterday:
Summing up, the situation is very tense and while most factors point to lower gold prices in the short run, there is one factor that prevents us from re-opening short positions in the precious metals sector at this point – the similarity of the recent decline-and-correction pattern to what we’ve seen previously. At this time the scenario in which we’ll see another short-term move up, like in February and early March this year, still can’t be ruled out. If gold stocks continue to disappoint and gold continues to perform poorly given signals from the USD Index, we will most likely see the short positions as justified (we’re very close to this point) – but that is not the case just yet.
With gold stocks being very close to their 2008 and 2014 lows and silver close to $15, it’s certainly good to be out of the market with the long-term investments in this sector – something that we have been writing about for many months now. It seems that we will see much lower prices for precious metals in the coming weeks or months regardless of the short-term developments.
It seems that another trading opportunity is just around the corner and even though not much seems to be going on, it seems that paying close attention to the precious metals market at this time and in the coming days will be well worth it. We will be monitoring the market and we’ll keep you – our subscribers - informed.
To summarize:
Trading capital (our opinion): No positions
Long-term capital (our opinion): No positions
Insurance capital (our opinion): Full position
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 automated tools (SP Indicators and the upcoming self-similarity-based tool).
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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