Gold & Silver Trading Alert: USD’s Breakout vs. Gold’s Response

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Briefly: In our opinion, full (150% of the regular full position) speculative short positions in gold, silver and mining stocks are justified from the risk/reward perspective. We are moving the stop-loss levels for gold and mining stocks higher. This position was originally featured on Jan. 12, 2017 at 3:49PM.

Today, the USD Index has broken out (and we have already profited on it in Forex Trading Alerts) above the declining short-term support line and the outlook for it has improved for the short term. However, gold didn’t plunge substantially and it is at higher levels than it was yesterday at the same time. Does this strength in gold indicate a change in the medium-term trend?

In short, in our opinion it’s too early to say that. A one-day event (yesterday’s move higher in gold without the USD’s decline) is not enough to prove that the gold will not really be moving higher regardless of what the USD Index does. If the situation in the USD Index wasn’t so bullish , gold’s outlook would have improved based on the above. However, the outlook for the USD Index is very bullish for the coming weeks and months and at this time it could be the case that the gold trader’s reaction will simply be delayed. Traders might not yet believe that the USD Index is indeed moving higher (after all, it’s been declining since the beginning of the year). In other words, one swallow doesn’t make a summer.

Let’s take a look at the USD Index’s chart (charts courtesy of http://stockcharts.com).

Short-term US Dollar price chart - USD

The breakout is not yet visible, as it happened after the markets closed yesterday, but at the moment of writing these words the USD Index is trading at 100.70, which is well above the declining red resistance line and the December 2015 highs as well. The move below the latter is therefore invalidated. Ideally, we would like to see a close above the December closes, but today’s pre-market move already has bullish implications.

Long-term US Dollar price chart - USD

Based on the short-term developments and the size of the corrective downswing (and the analogies that we described yesterday) it seems that a rally to 108 could already be underway.

Short-term Gold price chart - Gold spot price

Gold moved to the 50% Fibonacci retracement and the 300-day moving average, which is a quite bearish combination. We realize that other resistance levels that were supposed to stop gold’s rally – didn’t do so, however, it is not the resistance level alone that makes the current situation bearish anyway – it’s what happened in the USD Index.

Short-term Silver price chart - Silver spot price

Silver closed at new highs yesterday, but is back at $17.53 at the moment of writing these words, so all in all, not that much changed. The thing that is quite meaningful is the size of the volume in gold and silver – it was low, so the breakouts above previous highs should not really be trusted.

In fact, the volume levels seem to confirm what we wrote about earlier – traders don’t believe in the USD’s turnaround yet – they remain on the sidelines, which is illustrated by low volume. Consequently, gold’s and silver’s strength relative to the USD Index that we saw yesterday should not (yet) be viewed as a game-changer.

HUI Index chart - Gold Bugs, Mining stocks

The move higher in the gold stocks was visible and significant, and if it wasn’t for the situation in the USD Index and RSI at 70, the above could be viewed as important. However, both factors are present and especially the USD Index’s implications are critical.

Summing up, it seems that the next huge rally in the USD Index has just started and the implications for the precious metals market are very bearish. Yesterday’s strength relative to gold is generally a bullish sign, but we don’t think this is the case this time because it was just a one-day event that took place on low volume in gold and silver. It simply seems that traders are not convinced about the USD’s rally just yet. As the latter continues to move higher, the regular gold-USD link is likely to return and gold is likely to catch up and decline.

We are moving the stop-loss levels for gold and mining stocks a bit higher due to the recent upswings along with the improvement in the outlook for the USD Index.

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

To summarize:

Trading capital (supplementary part of the portfolio; 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 / profit-take orders:

Gold: exit-profit-take level: $1,063; stop-loss: $1,263; initial target price for the DGLD ETN: $81.88; stop-loss for the DGLD ETN $48.47
Silver: initial target price: $13.12; stop-loss: $18.07; initial target price for the DSLV ETN: $46.18; stop-loss for the DSLV ETN $22.24
Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $26.34; initial target price for the DUST ETF: $143.56; stop-loss for the DUST ETF $21.37

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: $45.31
JDST ETF: initial target price: $104.26; stop-loss: $10.78

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

Insurance capital (core part of the portfolio; our opinion): Full position

Please note that the in the trading section we describe the situation for the day that the alert is posted. In other words, it we are writing about a speculative position, it means that it is up-to-date on the day it was posted. We are also featuring the initial target prices, so that you can decide whether keeping a position on a given day is something that is in tune with your approach (some moves are too small for medium-term traders and some might appear too big for day-traders).

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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