Gold & Silver Trading Alert: USD Rallies Once Again While Gold Declines

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Briefly: In our opinion, a speculative short position (half) in gold, silver and mining stocks is justified from the risk/reward point of view.

The precious metals declined once again yesterday. This time it seems that it was a response to a rally in the USD Index. Will the currency index cause gold, silver and mining stocks to move even lower or is this a temporary move and the declining USD will cause PMs to rally?

We think that the former is much more likely. In short, our previous comments remain up-to-date and there have been no meaningful changes, but we will go over yesterday’s price/volume developments anyway. Let’s start with gold (charts courtesy of http://stockcharts.com).

Short-term Gold price chart - Gold spot price

Gold managed to once again close below the 38.2% Fibonacci retracement level based on the Jan.-Mar. decline and the implications are bearish. Gold also moved below the rising support line, but the breakdown is rather insignificant and it’s not confirmed, so it didn’t make the situation more bearish. Consequently, the outlook remains bearish, but it didn’t become very bearish. Please note that today’s pre-market $10 rally (that’s what we see at the moment of writing these words) doesn’t change the above.

Short-term Silver price chart - Silver spot price

In yesterday’s alert we wrote the following about silver:

The white metal declined on significant volume yesterday, which is a bearish sign. However, silver’s decline (along with today’s pre-market move lower to $16.30) didn’t result in a breakdown below the lower of the declining red lines. These lines are important because they are the borders of a possible flag pattern. The “problem” with this pattern is that it’s a sign of continuation of the move preceding it, which in this case, was up. If we saw a move above the upper of these lines, further rally would become probable. However, that’s not what seems likely to happen. We think that the likely outcome is that we will see a confirmed breakdown below this level and it will be this event that will make further declines more likely. We will consider doubling the size of the short position at that time.

The breakdown below the lower of the red lines was very small and the move is definitely not confirmed. Consequently, just like it is the case with gold, the outlook is bearish, but not very bearish.

GDX - Market Vectors Gold Miners - Gold mining stocks

Mining stocks moved lower once again, but they didn’t decline below the rising support line. Consequently – just like it is the case with gold and silver – the outlook remains bearish (as miners remain in a medium-term downtrend) but not very bearish.

Short-term US Dollar price chart - USD

3 days ago we wrote the following about the USD Index:

The USD Index is now very close to its cyclical turning point, which – given the recent decline - means that the uptrend could resume relatively soon.

The US dollar moved below 2 black support lines (which were not very strong) but is above the red support line, and given the proximity of the turning point, reaching this level could trigger a rebound. If the USD Index moves higher and invalidates the breakdown below the 2 support/resistance lines, then it will be even more likely to rally further, likely above March high.

With situation rather positive for the USD Index, the implications are negative for the precious metals sector.

The USD Index has indeed invalidated the breakdowns and thus it’s likely to move much higher, likely above the March high. The implications for the precious metals sector are even more bearish than they were yesterday.

Finally, we would like to say that the signals from the Fractalyzer remain unchanged - the current price paths in the case of silver and the HUI Index point to much lower prices but the tool points to higher prices in the case of gold, so overall the indications for the precious metals sector are bearish, but not very bearish.

Summing up, our previous comments remain up-to-date and the outlook for the precious metals market remains bearish for the medium and short term but has not become very bearish just yet.

We will keep you – our subscribers – updated.

To summarize:

Trading capital (our opinion): Short (half position) position in gold, silver and mining stocks is justified from the risk/reward perspective with the following stop-loss orders and initial (!) target prices:

Gold: initial target price: $1,115; stop-loss: $1,253, initial target price for the DGLD ETN: $87.00; stop loss for the DGLD ETN $63.78
Silver: initial target price: $15.10; stop-loss: $17.63, initial target price for the DSLV ETN: $67.81; stop loss for DSLV ETN $44.97
Mining stocks (price levels for the GDX ETN): initial target price: $16.63; stop-loss: $21.83, initial target price for the DUST ETN: $23.59; stop loss for the DUST ETN $12.23

In case one wants to bet on lower junior mining stocks' prices, here are the stop-loss details and initial target prices:

GDXJ: initial target price: $21.17; stop-loss: $27.31
JDST: initial target price: $14.35; stop-loss: $6.18

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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