Gold & Silver Trading Alert: Volatility Ahead

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Briefly: Short positions (full position) in gold, silver and mining stocks are justified from the risk/reward perspective.

The precious metals market didn’t do much yesterday, so we don’t have much to comment on as the outlook didn’t change, but there are still 2 things that we would like to discuss.

The first thing is that we would like to discuss is the situation on the short-term gold chart (charts courtesy of http://stockcharts.com).

Short-term Gold price chart - Gold spot price

In yesterday’s alert we wrote the following:

On the above short-term chart, we see that gold declined on increased volume (bearish implications), but we also see that gold moved to the short-term rising support line, which is bullish as there was no breakdown. Overall, the implications of Friday’s action are mixed… And that’s the only somewhat bullish indication that we’ve got. Now, let’s take a look at the Japanese yen currency exchange rate, which is highly correlated with gold.

There was no breakdown, but only according to Stockcharts’ data providers. Looking at other websites and closing prices (for instance kitco.com, gold-eagle.com) we see that gold closed at about $1,336 (so there actually was a breakdown) and it didn’t move back above the rising support line yesterday, so looking at the prices from other data providers we get even more bearish implications than what we discussed yesterday.

GDX - Market Vectors Gold Miners - Gold mining stocks

In yesterday’s alert we commented on the short-term performance of mining stocks in the following way:

On the short-term basis, the implications are also bearish because the miners’ decline on big volume and the Stochastic indicator confirmed the bearish implications.

Yesterday, miners tried to move back up, but ultimately rose only a bit on low volume (which has bearish implications on its own) and failed to close above the previous highs. This is a bearish kind of action – something that we would like to see as a top’s confirmation.

Summing up, last week was rich in bearish developments in the precious metals market and this week seems to provide bearish confirmations – at least so far. The medium-term outlook remains bearish and so does the short-term outlook. Consequently, we think that the speculative short positions remain justified from the risk to reward point of view. If the analogy to the 1983 is to be upheld, we are only after the very initial part of the decline. Details discussed in yesterday’s alert remain up-to-date, so if you haven’t had the chance to read it so far, we recommend that you do so today.

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

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): Short positions (full position) in gold, silver and mining stocks are justified from the risk/reward perspective with the following entry prices, stop-loss orders and initial target price levels:

Gold: initial target price: $1,006; stop-loss: $1,423, initial target price for the DGLD ETN: $74.37; stop-loss for the DGLD ETN $34.91
Silver: initial target price: $13.12; stop-loss: $21.63, initial target price for the DSLV ETN: $39.78; stop-loss for the DSLV ETN $14.34
Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $33.17, initial target price for the DUST ETF: $16.38; stop-loss for the DUST ETF $3.77

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: $54.29
JDST ETF: initial target price: $14.39; stop-loss: $3.22

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

Insurance capital (core part of the portfolio; 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 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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