Gold & Silver Trading Alert: USD’s Plunge and Gold’s Reaction

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Briefly: In our opinion, no speculative positions in gold, silver and mining stocks are justified from the risk/reward point of view. We plan to open short positions relatively soon (within a week, possibly this week).

The precious metals market moved higher and the size of the volume that accompanied rallies in gold, silver and mining stocks were significant. The action seen in the USD Index was even more profound. Is the USD’s slide and gold’s rally just a start of much bigger moves?

In our opinion that’s not likely. The move in the USD Index was indeed major and it is very likely the reason behind the rally in metals and miners. In yesterday’s alert we wrote that a breakdown below 97.5 would be significant, but it appears that while it was indeed significant for the USD Index (which moved even lower and is currently trading at 96.7), it was not as significant for metals – the strength of gold’s and silver’s reaction to this move was rather limited (metals rallied, but they stopped fully reacting to what the USD was doing in the final part of the session). We’re seeing the same today – gold is up about $10 which is a rather tiny amount given an index-point decline in USD. With this kind of reaction gold doesn’t have to rally even if the USD slides much further. On a side note, it seems that the USD Index will find support relatively soon.

Moving back to the precious metals, let’s take a look at gold (charts courtesy of http://stockcharts.com).

Short-term Gold price chart - Gold spot price

Gold moved right to the declining medium-term resistance line yesterday. The volume was high, but the same was the case when gold was forming tops in January 2015 and October 2015, so it’s not a bullish sign. The RSI indicator is almost at the 70 level (69.61) and this serves as a sell signal as well.

However, gold moved sharply higher once again today and thus the breakout above the declining resistance line is now very visible. Consequently, we might see a bigger rally (perhaps to the late-2015 high of $1,190) and in this case exiting short positions now and re-entering them at higher values appears to be justified from the risk/reward point of view.

Gold to bonds ratio chart - GOLD:DJCB

The gold to bonds ratio suggests that the top is in or close to being in as it moved right to its 50-week moving average. It’s been the case for much more than a year that moves to this average were always followed by significant declines and with this kind of efficiency, short positions should be at least considered, not long ones.

Short-term Silver price chart - Silver spot price

Silver rallied sharply yesterday, but those who have been following our analyses and the precious metals market for long know that silver’s breakouts and outperformance is often a sign of a coming decline. The size of the volume and the size of the rally make yesterday’s session similar to what happened in late October 2015 and overall it seems too early to say that silver’s move higher really had bullish implications. Please note that if the post-October-2015 slide repeats, silver will erase all the recent rallies relatively quickly and then move to new lows.

HUI Index chart - Gold Bugs, Mining stocks

The HUI Index moved higher, but as you can see on the above chart it remains below the long-term declining resistance line and is now relatively close to it (based on today’s early movement it has already been reached). This line stopped last year’s rallies and it’s very likely that it will stop the current one as well.

During the previous head-and-shoulder-shaped consolidation miners moved visibly higher 2 times before they plunged and declined to 100. Gold stocks are now moving higher a second time and are about to approach the resistance line that stopped them 2 times in the past. Will gold stocks plunge once again and once again slide to new lows? Most likely, yes.

Summing up, the outlook for the precious metals sector remains bearish, but based on today’s strong move above the declining resistance line in gold it seems that metals and miners might go even higher temporarily before reversing and plunging to new lows. Consequently, we are closing the current short position and plan to re-open it relatively soon. Based on today’s move in the HUI Index, it seems that we are very close to re-opening the positions – we might even re-open them tomorrow or later today.

The most important thing is that we haven’t seen enough confirmations that the final bottom is already in. This means that the final bottom is most likely ahead and thus that we are likely to see prices below the previous lows. Consequently, whatever move happens to the upside in the meantime, it’s likely to be erased, just like the current rally. Whatever profits that have not been made yet through short positions are likely to be made likely quite soon.

Please note that if we re-enter the short position at higher prices and profit on the next big downswing in metals and miners, then closing the short position temporarily will actually have a positive impact on the profits that we’ll make this year.

On a side note, today’s alert is posted a bit later than usually, because based on the changes in the market we re-wrote the alert 3 times before it was posted.

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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Hand-picked precious-metals-related links:

WGC: World Official Gold Holdings

Would You Risk Going to Jail to Fix the Fix?

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