Briefly: In our opinion no speculative positions are currently justified from the risk/reward point of view.
The USD Index refused to rally in the past few days, but it also refused to slide back down despite a sizable rally in the past weeks. Gold, on the other hand, continued to move lower – not much, but the size of the move is definitely bigger than what we saw in the USD. We can say the same about silver, but not really about mining stocks. What can we infer from the above?
Taking a look at the gold-USD link alone, we can infer that the situation deteriorated for metals as the strength in gold relative to the USD that we saw about a week ago was invalidated. Let’s take a closer look at the charts (charts courtesy of http://stockcharts.com).
The situation in the USD Index changed a bit, but not because of the price movement but because of the time that has passed since we saw the USD’s turning point. When we first wrote about the possibility of seeing a bigger pullback it was right after the turning point – at that time, the latter was also an important bearish factor for the USD Index (and a bullish one for metals and miners). However, some time passed and we saw no decline – just a small sideways movement. Since the USD Index is no longer so close to the turning point, the latter is no longer pointing to lower prices and thus, we have fewer reasons to think that the USD is going lower shortly.
Another thing that time – and the small consolidation – changed is the shape of the top/consolidation. The point is that all local tops since the December 2015 (when the decline started) have been formed quickly and we saw a visible decline no more than 1 day after the top with only one exception in early March 2016, when it took 2 days. We are currently after the third day and the last few days now – in light of the above – look much more like a consolidation than a top.
The current True Seasonal tendencies remain in place and we still could see a corrective downswing from here, but based on what we wrote previously, it’s no longer as likely as it was a few days ago.
The True Seasonal patterns for gold suggest that a short-term bottom was just formed and a second-half-of-May corrective upswing is coming. Will the gold market wait with the decline until early June? Possibly, but if we see strong bearish confirmations (like silver’s short-term outperformance) within a week or so, we will not wait until next month to re-enter the short positions.
The above remains up-to-date – the seasonal patterns continue to favor a corrective upswing in metals.
Gold moved a bit lower in the past few days and the size of the decline is not significant by itself, but it is in light of the corresponding (lack of) action in the USD Index. The confirmed breakdown below the March 2016 high is pointing to lower prices and without a decline in the USD Index the slide in gold will likely continue.
Silver closed at the support level, but it moved below it in today’s pre-market trading and overall we can say the same about the performance of silver, as we said about gold. The white metal is not showing strength relative to the USD Index, but the weakness and the odds for a bigger corrective upswing have now decreased significantly.
As far as mining stocks are concerned, we wrote the following:
Miners plunged on huge volume. This is a classic bearish sign, however, based on the previous several similar days after which miners didn't decline, we view it only as a moderately bearish sign, especially that miners didn’t move below their May lows (let alone both April highs).
If we get a confirmed breakdown below the above, we might re-open the short positions, but it’s more likely that we’ll see a pullback in the USD and a corrective upswing in metals and miners.
The history repeated itself and instead of the “classic” decline, the big decline was followed by a significant reversal. Mining stocks’ strong performance is even more significant given that both gold and the general stock market finally closed lower.
The breakdown below the previous May lows was not only not confirmed – it was quickly invalidated.
There are two additional – and important – things that make us think that corrections in the USD and metals are likely to be seen.
On Friday, mining stocks refused to move lower as well, ending the session a bit higher, despite declines early in the session.
Monday’s session was a bit weaker, but the mining stocks still managed to close above the previous low. They are, therefore, outperforming the metals, which is a bullish sign.
What does it all imply? That the situation became less bullish for the precious metals sector - rather unclear as far as the short term is concerned. With about a 55% probability (our subjective guesstimate) of a corrective upswing in metals it is no longer justified to keep even the small long positions intact. The seasonal patterns and the gold to oil ratio continue to favor higher prices of metals and miners, but other factors like the likelihood of seeing a decline in the USD Index, and the gold-USD link no longer support the bullish outlook in the metals, and the former factors – on their own – are not strong enough to make the outlook bullish enough to justify betting on higher prices of metals and miners at this time.
Depending on how the situation evolves, we will either go long or short, but going short is much more likely as this would be in tune with the bigger trend.
Summing up, since the USD Index moved away from the cyclical turning point and the last few days no longer resemble what we saw at previous local tops, it appears much less likely that a pullback will be seen shortly and in light of the above, the much more bearish gold-USD link than previously, the short-term outlook for the precious metals sector deteriorated. Some factors still point to higher prices in the short term, but there’s not enough of them and too many bearish factors are present to justify even a small long position at this time.
As always, we will keep you – our subscribers – updated.
To summarize:
Trading capital (our opinion): No positions
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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