Gold & Silver Trading Alert: USD’s Pullback – Implications for PMs

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Briefly: In our opinion no speculative short positions are currently justified from the risk/reward point of view. We will likely re-enter the short positions shortly.

Gold moved initially higher yesterday, but finally closed the day only a little higher than on Friday. We can say the same about silver, and mining stocks moved higher a bit more significantly. What are the implications?

There are none so far. In terms of closing prices, we saw nothing new in gold, silver or the USD Index and mining stocks outperformed, which would be a strong bullish sign if it weren’t for the rally in the general stock market – given the latter, the implications of the miners’ rally are only mildly bullish.

Let’s take a closer look (charts courtesy of http://stockcharts.com).

Short-term US Dollar price chart - USD

Since nothing changed on the USD Index chart, our yesterday’s comments remain up-to-date:

On the short-term chart we see that the USD Index moved close to its April highs on Friday, but didn’t close above them. It could be the case that the traders are now betting on a reversal and that’s why gold and silver didn’t decline yet. Consequently, another big daily slide in metals could be seen once USD breaks above the April highs. This, however, may not happen right away, but in a week or so. Why? The cyclical turning point could still result in a temporary move lower and there is a seasonal tendency for the USD Index to correct the rally in mid-May.

True Seasonal tendencies for US Dollar Index

Nothing happened yesterday, but given the above seasonal tendency and the cyclical turning point, a correction in the USD Index is quite likely here. How low could the USD move shortly? To 93.2 – 94 or so, and such a move would not invalidate the medium-term trends (up in the USD and down in metals). The range for this target is quite wide, so we will not aim to enter short positions in metals and miners based on any specific level reached by the USD Index. Instead we will re-enter the positions based on the weakness in metals. At some point metals will most likely stop reacting to the dollar’s declines and we’ll see some additional bearish confirmations (perhaps in the form of underperforming mining stocks or very short-term outperformance in silver) – we plan to re-enter the short positions at that time.

Short-term Gold price chart - Gold spot price

Short-term Silver price chart - Silver spot price

As we already discussed earlier, gold and silver moved higher on an intra-day basis yesterday, but closed without a bigger change. This doesn’t add much to the above discussion – the likely pullback in the USD Index and the relative performance of metals vs. the USD appears to be the key thing to monitor right now.

GDX - Market Vectors Gold Miners - Gold mining stocks

Mining stocks moved higher and outperformed gold but that’s only mildly bullish because other stocks rallied as well and the miners’ move materialized on relatively low volume.

Summing up, the medium-term outlook for the precious metals sector remains down despite gold making the headlines and despite short-term strength that we saw on Friday. However, on a short-term basis and based on gold and silver’s ability to move higher despite a move higher in the USD Index and the likelihood of a pullback in the latter, it appears that we may see a rally this week. We plan to re-enter short positions in the precious metals sector when the risk to reward ratio becomes more favorable.

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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