Briefly: In our opinion, speculative short positions (150% of the full position) in gold, silver and mining stocks are justified from the risk/reward point of view.
Earlier this week gold and silver declined, while miners held up relatively well and the opposite was the case yesterday – gold and silver moved higher, while miners declined. It all happened along with a decline in the USD Index – what can the metals-USD link tell us in this case?
That the outlook didn’t change for the precious metals sector and that it remains bearish. Why? Because the USD moved to a new low yesterday while gold didn’t move to new highs and then it even gave away about half of the previous gains. Gold didn’t break above even the lowest of the support lines either. Consequently, the move a bit higher in gold is not a bullish sign – it can be viewed as underperformance, which is actually bearish.
As far as the link between gold and mining stocks is concerned, we don’t think there are any implications of this week’s performance as overall nothing really changed. Silver outperformed gold a bit yesterday, which is not bullish either, as silver tends to do that right before plunging. Let’s take a look at the charts starting with gold (charts courtesy of http://stockcharts.com).
Once again there are no changes on the long-term gold chart and our previous comments remain up-to-date:
From the long-term perspective, nothing happened yesterday, just like nothing happened after Tuesday’s session, so the outlook remains just as it was before this week began – it remains bearish.
The sell signal from the Stochastic indicator remains clearly visible and gold remains within the declining trend channel.
We previously wrote the following:
As far as the short term is concerned, the trend remains down as well. Gold declined and practically erased Tuesday’s rally. The market participants seem to have realized that actually nothing changed based on Yellen’s recent comments and things are returning to normal after some very short-term volatility. Speaking of volatility, we could see some more of it on Friday before and right after the employment numbers are released. This is not likely to change the current trend, which remains down.
Even though gold moved a bit higher, it didn’t rally above the declining red resistance line and gold generally (despite a temporary move above it) remains below the lowest (38.2%) of the Fibonacci retracement levels.
Consequently, nothing really changed and the outlook remains bearish.
As far as silver is concerned, once again nothing changed (a daily move by 23 cents is not enough to change anything) – silver is close to where it closed the previous week and the outlook remains bearish – silver remains below the key green resistance line and our previous comments remain up-to-date:
Silver topped at the declining green resistance line and the rally appears to be over. Once silver confirms the breakdown below the 50-day moving average, the decline will likely accelerate. The major trend remains down.
Mining stocks moved lower yesterday and the current situation continues to be similar to what we saw in October 2015. It implies that a decline is likely to start relatively soon, but it’s difficult to predict exactly when as the sideways move also took some time back in October. Naturally, just as the size of the preceding upswing and consolidation, the size of the decline is also likely to be bigger than what we saw in October.
The following comments on the above chart remain up-to-date:
Moreover, since mining stocks didn’t move above the early-March high, it could be the case that a head-and-shoulders formation is underway. It’s too early to say so, because GDX would have to break below $19 for the formation to be complete, but still, that’s something that could be seen in the following days.
Before summarizing, let’s take a look at what happened in the USD Index.
In yesterday’s alert, we wrote that a double bottom was quite likely and this still remains to be the case (with the second bottom being a bit lower than the previous one). The key thing is that the move below the most important support lines was tiny and the breakdown is not confirmed. The above blue line is significant, but the most important line is visible on the long-term chart below.
There was only a very small breakdown and since it was not confirmed, the outlook remains bullish and this year’s decline appears to be nothing more than just a verification of the breakout above the declining red support line (visible on the long-term chart).
The link between the precious metals market and the USD Index continues to have bearish implications as at the same time: the USD is likely to move higher and metals are likely to respond to the USD’ rally quite significantly whereas if the decline in the USD continues (which is unlikely but possible), metals are not likely to rally far and such a rally would not likely be sustainable.
Summing up, the outlook for the precious metals sector remains bearish. Gold moved a bit higher yesterday, but in light of the corresponding action in the USD Index and the size of the rally in gold, it seems that it can also be viewed as gold’s underperformance. Consequently, we think that a speculative short position is currently justified from the risk to reward point of view.
As always, we will keep you – our subscribers – updated.
To summarize:
Trading capital (our opinion): Short positions (150% of the full position) in gold, silver and 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: $1,304, initial target price for the DGLD ETN: $90.29; stop-loss for the DGLD ETN $48.27
- Silver: initial target price: $12.13; stop-loss: $16.62, initial target price for the DSLV ETN: $71.92; stop-loss for DSLV ETN $36.89
- Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $22.57, initial target price for the DUST ETF: $7.60; stop-loss for the DUST ETF $2.16
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: $31.23
- JDST ETF: initial target price: $14.14; stop-loss: $4.05
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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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager
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