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. This position was originally featured on Jan. 12, 2017 at 3:49PM.
The precious metals sector moved higher this week, but even more visible action took place in the USD Index. The latter plunged sharply after the rate hike announcement and it’s been declining since that time. What are the implications? In short, they are critical.
Even though the above may give the impression that the outlook for the USD Index is bearish, it is actually the other way around. Yes, the USD Index declined, but just because something moved in a given way, it doesn’t mean that this move’s continuation is likely. The cyclical turning point in the USD Index and the long-term chart make it clear that this decline is something that actually has bullish implications as it makes the following (likely epic) rally even more probable. We discussed details in yesterday’s alert, so in today’s alert we’ll focus on yesterday’s and today’s changes.
Let’s take a closer look at the charts for details (charts courtesy of http://stockcharts.com).
The USD Index declined below the support levels, but only one close below them doesn’t mean that the breakdown is verified. Conversely, since the breakdown took place right at the turning point, it’s rather likely that it will be invalidated.
The interesting – and bearish for PMs – thing is that even though USD declined yesterday, only gold moved a little higher. Silver and mining stocks didn’t. The size of yesterday’s price moves suggests that an additional decline in the USD Index (even if it declines to the February low at about 99.2, it would still not invalidate the medium-term bullish outlook) may not translate into much higher precious metals prices.
Gold corrected to its 50% Fibonacci retracement and closed below it – more or less at its mid-Feb low. It could be the case that gold is forming a bearish head-and-shoulders pattern here and it will continue to be the case unless gold breaks above the early-February high. Whether this will be the case or not, will depend on the performance of the USD Index.
As we discussed above and yesterday, the big deal is that the really big move in the USD Index is very likely to be to the upside and whether we see a temporary move lower in the meantime (it’s not likely to take more than several days) is of little importance. It seems that we can say the opposite about the situation in gold – it could move several dollars higher, but is it really that important if its likely to move tens (and hundreds) dollars lower? In case of day-traders, this could make a difference, but generally, it doesn’t seem that paying a lot of attention to this short-term price movement at this time is critical – there are too many signs pointing to much lower prices in the coming weeks.
In yesterday’s alert we wrote that the decline in the mining stocks is in tune with the previous decline and thus the corrective upswing should not be surprising.
As you can see on the above chart, we can say the same about silver. The white metal’s decline remains in tune with both major declines of the past decade: the 2008 slide and the 2012-2013 slide.
Mining stocks declined yesterday after moving to their 50-day moving average. This MA served as a quite important resistance in the past (twice in November 2016 and also in September 2016) so it could be the case that the rally is over or almost over (another move back to this MA can’t be ruled out).
In terms of daily changes, miners declined yesterday even though gold continued to rally, which is generally a bearish sign.
Summing up, this week’s most important development wasn’t about gold or silver and not even about mining stocks, but about the USD Index, which seems to have completed a very important corrective pattern. Even if the USD Index moves a little lower (99.2 being the likely maximum target for the decline) it doesn’t have to trigger a substantial rally in PMs as yesterday’s session showed that silver and miners are not necessarily willing to follow USD’s lead. The key thing to keep in mind is the likely huge rally in the USD Index and its negative impact on the precious metals sector.
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: $1,273; initial target price for the DGLD ETN: $81.88; stop-loss for the DGLD ETN $48.17
- Silver: initial target price: $13.12; stop-loss: $18.67; initial target price for the DSLV ETN: $46.18; stop-loss for the DSLV ETN $19.87
- 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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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager
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