Gold & Silver Trading Alert: USD Index Soared Yesterday; Gold Soars Today

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December 18, 2014, 7:02 AM

Briefly: In our opinion no speculative short positions in gold, silver and mining stocks are currently justified from the risk/reward perspective.

Yesterday’s session included the dollar’s show of strength but it didn’t really feature gold’s significant decline. Is gold simply hesitating and will reply to the dollar’s bearish signals in the coming days? Or perhaps today’s pre-market rally is a beginning of another big upswing?

Both scenarios are possible, however the potential size of the move is bigger in case of the bearish case. What we wrote in the previous days remains largely up-to-date (signals from various markets and ratios – especially gold stocks to gold ratio – have bearish implications), so in today’s alert we’ll focus on the changes seen in the USD Index and gold.

Let’s start with the former (charts courtesy of http://stockcharts.com).

Short-term US Dollar price chart - USD

The USD Index moved higher just as it had been likely to, based on the short-term trend channel. The USD Index reached the rising support line, which means that a local bottom is likely in and we will see another move higher relatively soon. Yesterday’s rally confirms this outlook. That’s bearish information for gold.

Quoting the previous alert:

In the recent alerts we wrote 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.

The price action that we have been seeing in both markets in the last few days indicates that this might indeed be the case. The last few days in particular showed that gold could decline without the dollar’s help. On the other hand, yesterday’s action didn’t confirm it. Will this kind of relationship continue? It seems rather likely but not (yet) very likely. We still remain cautious, but more and more leaning toward the bearish outlook for the short term.

Long-term Gold price chart - Gold spot price

Meanwhile, 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.

Short-term Gold price chart - Gold spot price

The short-term picture is the reason for which we don’t think that gold’s ability to decline despite the dollar’s price moves is still confirmed at this time. Gold moved lower yesterday, but the move was relatively small, while the USD Index rallied really significantly. In yesterday’s alert we wrote the following:

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 above remains up-to-date as yesterday’s price swing was not significant. Today’s pre-market move is more visible (about $20 move higher), which means that the above self-similar tendency remains in place and has bullish implications.

However, since other factors remain bearish (as described in previous alerts), 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 (even more based on yesterday’s price action), 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.

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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