Briefly: In our opinion, short (full) speculative positions in gold, silver and mining stocks are justified from the risk/reward point of view.
In the last several days gold moved much higher and just moved lower a little. The USD Index, however, rallied back quite significantly. Is this strength in the gold market heralding much higher prices sooner?
Not really. We think that this phenomenon is not bullish just yet. If this situation persists for another week or more, then it might be a reason to be concerned even without considering other factors. However, it's too early to say so now - the odds are that it's just a coincidence, especially that silver outperforms gold on a shor-term basis, which is something that preceded local tops in the previous months and years.
Let’s move to charts (charts courtesy of http://stockcharts.com).
Gold declined yesterday, but the move materialized on relatively low volume, which might seem to be a bullish sign, but it actually isn’t. It’s a rather neutral signal as there were cases when gold declined after such sessions and some signs after which it rallied. Other than that, there’s little new to say about the above chart, so in general, our yesterday’s comments remain up-to-date:
Gold moved above its 50-day moving average, but this is much less bullish than it may seem. In fact, it’s not bullish at all. The reason is we saw such action several times earlier this year and it was still followed by more declines. Is this time different? Not likely – why would it be?
Gold corrected more than 50% of the Aug. – Sep. decline – it rallied to the 61.8% retracement and it could reverse shortly. However, if it doesn’t and we see a rally to $1,150 - $1,155 or so, then this would still not change the medium-term trend. Gold would still remain below the declining medium-term resistance line. Will gold move as high before reversing? That’s rather unclear but the decline is more likely than not and it doesn’t seem that exiting the short positions in light of the above possibility is really justified.
From the long-term perspective, nothing changed – the medium-term trend remains down.
Gold seen from the non-USD perspective moved to the declining resistance line and then reversed. The local top seems to be in or just around the corner. This implies not only that gold’s strength relative to the USD Index is nothing extraordinary, but also that it’s likely to be over relatively soon (if it’s not over already at this point).
The long-term silver chart continues to have bearish implications as silver moved to the long-term declining resistance line and reversed. It seems that silver is ready to decline once again. Silver’s temporary outperformance of gold doesn’t change the above – conversely, it served as a bearish confirmation many times in the past.
What about mining stocks?
Miners declined on volume that was higher than what we had seen during the previous day’s upswing, so we have some small bearish implications here.
What’s more bearish is the move back below the 50-day moving average. In the previous case (in August) it was this phenomenon that marked the beginning of a bigger decline in the precious metals sector.
We would like to point out that whether miners decline immediately or not (not immediately but rather after several days), the short-term term will clearly remain down as long as miners don’t confirm a breakout above the declining resistance line.
The USD Index chart continues to have bullish implications as far as the index itself is concerned, and bearish ones as far as precious metals are concerned. The reason is that it seems that the USD Index is done declining (after reaching our target area) and ready to move highs. Just because metals and miners are not responding to the rally in the USD is not concerning, because this temporary lack of reaction is within the historical norm and the medium-term trend which we described earlier today (the gold to UDN ratio).
All in all, we can summarize today’s alert just as we summarized yesterday’s issue:
Summing up, we had seen some additional strength as a possibility and this week it materialized, however, this move higher doesn’t seem to be anything more than a counter-trend correction. The medium-term trend remains down and there are some signs that this corrective rally is already over or about to be over. It seems that the profits from our short position will increase significantly in the coming weeks (not necessarily days).
As always, we will keep you – our subscribers – updated.
To summarize:
Trading capital (our opinion): Short position (full) position in gold, silver and mining stocks is justified from the risk/reward perspective with the following stop-loss orders and initial (! – this means that reaching them doesn’t automatically close the position) target prices:
- Gold: initial target price: $1,050; stop-loss: $1,213, initial target price for the DGLD ETN: $98.37; stop loss for the DGLD ETN $65.60
- Silver: initial target price: $12.60; stop-loss: $16.73, initial target price for the DSLV ETN: $96.67; stop loss for DSLV ETN $40.28
- Mining stocks (price levels for the GDX ETN): initial target price: $11.57; stop-loss: $17.33, initial target price for the DUST ETN: $41.10; stop loss for the DUST ETN $8.54
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: initial target price: $16.27; stop-loss: $24.33
- JDST: initial target price: $16.98; stop-loss: $3.42
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 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
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