Briefly: In our opinion, long (full) speculative positions in gold, silver and mining stocks are justified from the risk/reward point of view.
The precious metals market moved higher as we expected it to, but yesterday’s move higher was not accompanied by strong volume. The latter was weak and it’s no wonder that traders are considering exiting long positions. Is this a good idea?
In our opinion – not likely. The volume in gold and silver was lower than on the previous day (only slightly lower in the case of gold) but it was stronger in the case of mining stocks, so the implications are not that bearish. More importantly, metals and miners rallied in spite of the rally in the USD Index and we think the latter factor is more important than the weak volume in silver and – to some extent – gold.
Let’s take a closer look (charts courtesy of http://stockcharts.com).
Gold moved a bit higher and the volume was not strong on a relative basis – it was a bit lower than what we saw on Friday, when gold declined. The implications thereof are bearish, but mildly so.
The sell signal from the Stochastic indicator is only somewhat bearish, as these types of signals were quite often seen before tops and not at or after them. Plus, the more reliable version of this indicator (based on weekly closing prices) provides us with bullish implications as we recently saw a buy signal.
The breakout above the declining resistance line was recently confirmed and the bearish implications remain in place.
Overall, the above chart deteriorated only a little based on yesterday’s move higher.
In the case of silver the size of the volume is particularly low, but it’s usually the case that when signals from silver are not confirmed by other markets, they are not followed by action that one would expect to follow. In this case, we don’t think the low volume is particularly important.
Overall, it seems that silver is correcting after a sharp rally and it’s getting ready to move even higher temporarily.
We commented on the above chart in the following way yesterday:
Miners moved even lower, but not much lower – only to the 50% retracement level. The important thing is that the decline took place on tiny volume. It’s extremely low when we compare it to the volume on the previous 2 days, which suggests that Friday’s decline should not make one worried as it’s not the true direction in which the market is moving in the short term.
Miners moved higher on volume that was much higher than what we saw during Friday’s decline, so the implications here are bullish and silver’s supposedly bearish sign is actually not important, since it’s obvious that miners are not confirming it.
The most important thing, however, is the way gold, silver and mining stocks moved given the corresponding action in the USD Index.
The USD Index moved higher yesterday, so one would expect metals and miners to decline. But they didn’t. The precious metals market showed strength by moving higher and the fact that the volume was not ideal doesn’t change the bullish implications thereof.
Before summarizing, we would like to discuss the relative mining stock valuations.
This chart shows us several important things. First of all, mining stocks relative to other stocks (HUI Index to S&P 500 ratio) are in a major downtrend and they have not yet reached the key support level – the 2000 bottom. Consequently, the ratio and the rest of the precious metal sector may need to fall even further before the final bottom is in.
However, the ratio moved to a late-2001 low, which – while is not as important as the 2000 one – is somewhat significant and we are seeing a rebound (which is not unexpected). The ratio has some space for rallying, which means that we can see mining stocks (and metals) even higher before this corrective rally is completely over.
Why are we following the HUI to S&P ratio more closely than the XAU to S&P ratio? Because it’s more popular and hence the support levels from the former ratio are more meaningful for the entire precious metals sector as they do a better job of representing what the market participants think. Why do we think so? Google Trends allows us to measure the interest – here’s a chart showing how popular the 2 indexes are relative to each other (by the way, among other things that we are not featuring at all times but we continue to measure them are specific precious-metals-related search phrases – rising or declining interest in them can sometimes have implications for prices):
The HUI Index is definitely more popular and that’s been the case for years. Hence, we will continue focus on ratios involving it and use the XAU-related ratios as supplementary. On a side note, we don’t need the same kind of “research” for the S&P vs. DJIA decision to use in ratios, as the former represents a broad market, which makes it more useful regardless of popularity (which is huge anyway).
Let’s take a look at the XAU to S&P ratio anyway.
The above chart actually has major bearish implications. It just doesn’t provide us with a meaningful target, while the HUI to S&P ratio does.
The above ratio is already after a major breakdown and as such it’s likely to move even lower. Naturally, it’s oversold as well and one could say that this by itself suggests a turnaround. It does suggest a turnaround… eventually. It doesn’t imply one in the near future. Our point is that the breakdown below the 2000 low is much more meaningful than the oversold status on its own. It’s in tune with what happened previously. Back in 2013 the ratio was oversold and after a major breakdown and a massive decline followed. Even more importantly, back in 1997 the ratio moved below its major low (you can’t see it on the chart but the previous major low of this ratio was seen in late 1992 and early 1993. The breakdown – despite the oversold status – wasn’t reversed immediately. In fact it took more than 4 years for the ratio to move back to the 1997 levels. So much for the “bullish” implications of major breakdowns in oversold conditions.
Of course, if one looks at the relationship from the inverse perspective (S&P to XAU) then we have a breakout in 1997 and currently, the implications are similar. Just because such a ratio is overbought right now, it doesn’t imply that we will have to see a major reversal shortly – especially in light of the breakouts.
The sharpness of the recent move (which some indicators like the ROC or MACD might show) doesn’t necessarily imply a major reversal, just the increased likelihood of a pause or a counter-trend move – which would imply a corrective rally in the precious metals sector, the one we are already profiting on.
All in all, the relative valuations of mining stocks support our earlier outlook – the major decline is not over yet and we are in a short-term corrective upswing.
Summing up, while it doesn’t seem that the medium-term decline is over yet, it also doesn’t seem likely that the counter-trend short-term rally is over. It seems likely to us that we will see additional short-term strength before metals and miners turn south once again. Consequently, it seems likely that the profits on our long positions will become even bigger before this trade is over.
We will keep you – our subscribers – updated.
To summarize:
Trading capital (our opinion): Long position (full) position in gold, silver and mining stocks is justified from the risk/reward perspective with the following stop-loss orders and initial (! – this means that reaching them doesn’t automatically close the position) target prices:
- Gold: initial target price: $1,135; stop-loss: $1,063, initial target price for the UGLD ETN: $9.44; stop loss for the UGLD ETN $7.69
- Silver: initial target price: $15.90; stop-loss: $14.12, initial target price for the USLV ETN: $16.54; stop loss for USLV ETN $11.51
- Mining stocks (price levels for the GDX ETN): initial target price: $15.87; stop-loss: $12.37, initial target price for the NUGT ETN: $5.17; stop loss for the NUGT ETN $2.46
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: initial target price: $21.78; stop-loss: $17.67
- JNUG: initial target price: $12.01; stop-loss: $6.39
Long-term capital (our opinion): No positions
Insurance capital (our opinion): Full position
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.
=====
Latest Free Trading Alerts:
China added 19 tons of the shiny metal last month. What does it mean for the gold market?
Earlier today, the U.S. currency moved little lower against major currencies as investors looked ahead to Wednesday’s minutes of the Federal Reserve’s July meeting. Will they receive more clues about Fed’s plans to hike short-term interest rates? Before we know the answer to this question, let’s examine the current picture of EUR/USD, USD/JPY and USD/CHF.
Forex Trading Alert: Waiting for FED
=====
Hand-picked precious-metals-related links:
The gold bull of the great white north is ready to mine more
=====
In other news:
Forget China, the Fed needs to raise rates now: Top economists
Shanghai stocks plummet 6% as volatility returns
Greek confidence vote casts shadow over bailout
=====
Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Gold & Silver Trading Alerts
Forex Trading Alerts
Oil Investment Updates
Oil Trading Alerts
