Gold & Silver Trading Alert: USD and Metals at Previous Extremes

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Briefly: In our opinion, speculative short positions (150% of the full position) in gold and silver and small (50% of the full position) short position in mining stocks are justified from the risk/reward point of view.

Today’s alert is going to be rather short as not much happened yesterday and practically all charts that we featured yesterday remain up-to-date.

Gold closed about $2 lower, which is still above the March high, so there was no invalidation of the previous breakout. Consequently, it’s not surprising that the decline is not accelerating yet. Silver moved temporarily higher yesterday and then declined once again, finally declining 3 cents. This intra-day reversal is a bearish phenomenon as we had silver’s turning point yesterday – please take a look below (charts courtesy of http://stockcharts.com).

Short-term Silver price chart - SLV ETF - iShares Silver Trust

The reversal took place exactly on the turning point, which is bearish because otherwise there would be a remote risk that we would see a move higher as the previous short-term move was a decline. Now – after an intra-day move higher, it’s likely that what could have happened based on the turning point, has likely already happened. Consequently, the decline can now continue.

Mining stocks moved a bit higher yesterday, but that was rather normal given the sharpness of this week’s decline so far. No market can move in one direction without pauses and we just saw one – that’s natural and not bullish.

HUI Index chart - Gold Bugs, Mining stocks

The HUI Index didn’t break below the 2015 high, so our yesterday’s comments remain up-to-date:

(…) since gold stocks didn’t break back below the 2015 high the technical situation didn’t change that much. The HUI Index is quite close to this level so it could be the case that we’ll see breakdown today. Once that happens, we’ll likely increase the size of the short position in mining stocks. We will most likely wait for the daily close, but if something else convinces us that increasing the position in the miners is a good idea, we’ll let you know.

What is likely preventing gold and gold stocks from moving below their previous highs? The USD Index that hasn’t moved above its previous low yet.

Short-term US Dollar price chart - USD

The USD rallied in the past few days and it invalidated a few critical breakdowns below long-term support levels. However, on a short-term basis, there was no move back above the April low. As we wrote many times in the past, the precious metals market trends to react particularly strongly to breakouts in the USD Index, so without a short-term breakout (as traders seem to be rather short-term oriented) it’s no wonder that we are not seeing breakdowns in gold or mining stocks yet.

Does it matter? Not really, because the key – long-term – breakdowns were invalidated and the implications are very bullish for the following weeks – the lack of the short-term breakout is really of little meaning (compared to the above) even if it is being viewed as important by some market participants.

Summing up, the outlook for the USD Index remains bullish and the outlook for the precious metals sector remains bearish despite yesterday’s pause. It still seems better to wait for the mining stocks to close back below their 2015 high before increasing the size of the short position.

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

To summarize:

Trading capital (our opinion): Short positions (150% of the full position) in gold and silver and small (50% of the full position) short position in mining stocks are justified from the risk/reward perspective with the following stop-loss orders and initial target price levels:

Gold: initial target price: $973; stop-loss: $1,317, initial target price for the DGLD ETN: $89.05; stop-loss for the DGLD ETN $46.25
Silver: initial target price: $12.13; stop-loss: $18.17, initial target price for the DSLV ETN: $61.16; stop-loss for the DSLV ETN $26.34
Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $26.47, initial target price for the DUST ETF: $4.27; stop-loss for the DUST ETF $1.16 (the price for DUST is dependent not only on the prices of mining stocks themselves, but also on the way mining stocks decline and the real price that DUST will achieve will likely be much higher than this target, but the conservative pricing models don’t take - and generally can’t take - the above into account).

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: $39.43
JDST ETF: initial target price: $5.78; stop-loss: $1.60

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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