Gold & Silver Trading Alert: USD Soars and Metals Decline… a Little

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

Shortly after the USD’s breakout above the declining resistance line, the greenback rallied and it didn’t stop until it reached its July highs. In fact, the USD even managed to move slightly above it. What are the implications for the precious metals sector?

Let’s start today’s alert with the USD Index chart (charts courtesy of http://stockcharts.com).

Short-term US Dollar price chart - USD

The USD Index soared yesterday in a sharp manner and moved a bit above the July highs – we saw a breakout, but since the move is tiny, the breakout is not confirmed. Consequently, we are still likely to see a reversal relatively soon, or a pause. The former is more likely due to the proximity of the cyclical turning point.

Moreover, please note that the RSI Indicator just moved above the 70 level, which generally suggests that a turnaround is likely. Back in November 2015, when we saw such a development, the USD corrected, but it wasn’t the end of the rally, so the implications are bearish, but only for the short term.

At this time, we expect the USD Index to correct to the declining black support line and verify it as such, by not moving lower. At this moment, the support line is at about 96.50. An important note here is that the cyclical turning points work on a near-to basis, so we could still see some strength this week, even though a bigger correction is looming.

What’s the likely impact on the precious metals sector? Gold, silver and mining stocks seem to have stopped replying to the dollar’s rally and unless they start to do so again, the implications will be bullish for PMs.

In yesterday’s alert, we wrote the following:

If gold and silver don’t want to respond to USD’s rally, they are quite likely to respond to USD’s decline (the above indicates that people don’t seem to be willing to sell at this time, which means that buyer can easily outnumber them).

In addition to the above, we just saw a confirmation (third consecutive close) of the breakout above the declining black line. This line stopped the rally in July (which was the biggest rally in the USD this year) and we just saw a confirmed breakout above it, which is a big deal. As discussed earlier, the cyclical turning point is just around the corner, so the USD may not be able to rally very high (the July tops seem to be a probable target) before a turnaround and a corrective decline, but still, the outlook for the following weeks has just improved. This means that the implications for the precious metals sector became more bearish for the following weeks, but at the same time, we could see a rebound in PMs and miners as the USD corrects.

Consequently, we the odds for decline’s continuation in the following days declined from about 70%-80% to about 45%, which is means that keeping a position opened at this time is too risky.

The above remains up-to-date. It still seems that PMs will rally if the USD corrects here, but we expect the rally to be temporary. It seems that taking profits off the table yesterday was a good idea.

Short-term Gold price chart - Gold spot price

Short-term Silver price chart - Silver spot price

GDX - Market Vectors Gold Miners - Gold mining stocks

The indicators flashed buy signals and while buy signals from daily Stochastic are not very important (their efficiency is limited), the RSI for gold appears to be suggesting a short-term rally. It’s not yet back above 30, but it’s moving quite close to this level and please note that in each case (that is visible on the above gold chart) when the RSI first moved below the red line and then moved back 30, a rally followed either immediately or within 1-3 weeks. If we get more bullish confirmations we might open a long position here, but so far we haven’t seen enough of them to do so.

Summing up, due to the recent strength in the precious metals relative to the USD Index and the likely turnaround in the latter (perhaps after an additional small rally, but since the PMs no longer react to the USD’s upswings, it doesn’t really matter), it seems that exiting the short positions and taking profits off the table yesterday was a good idea. We may have a good opportunity to re-enter the short position at higher prices or open long ones shortly if we get additional bullish confirmations. We will be monitoring the market for opportunities and report to you accordingly.

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

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): No positions

Long-term capital (core part of the portfolio; our opinion): No positions

Insurance capital (core part of the portfolio; 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 signs 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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