Gold Stocks – Updated Target

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Briefly: In our opinion, full (150% of the regular full position) speculative short positions in gold, silver and mining stocks are justified from the risk/reward perspective at the moment of publishing this alert.

In yesterday’s alert, we discussed new signals and adjusted price/time targets for gold and silver. In today’s issue, we focus on the adjusted price/time target for mining stocks.

Before moving to the details, let’s briefly discuss yesterday’s price changes. Briefly, because overall not much has happened since we published our yesterday’s alert – gold and silver are more or less where they were about 24 hours ago. Still, silver temporarily moved back below the $16.80 level yesterday, showing that a weekly close below this level is clearly possible.

Gold has been moving back and forth after breaking $1,300, but it hasn’t managed to move above it – it seems that it’s verifying the breakdown. This is particularly interesting, given the action in the USD Index. The latter moved lower yesterday and it’s currently moving back and forth around the 92 level. The declining, short-term support line is currently at about 92.10, so the USD is breaking above it a little only to invalidate the breakout, which is followed by another breakout and invalidation, and so on and so forth. When we saw something similar (the USD moved lower after reaching the short-term resistance line) in the middle of August and at the end of August, gold and silver were quick to rally – and in this case, gold was not even able to invalidate the recent breakdown. This is a bearish, short-term sign for the precious metals sector.

This also tells us something about the “what if the USD declines back to 91?” issue. Based on the way in which the precious metals moved in the last 2 weeks, it seems that even if the USD was to decline once again, gold and silver would not rally substantially – almost certainly (there are no certainties in any market) not above their recent September highs.

Having said that, let’s move to the analysis of the long-term HUI Index chart (chart courtesy of http://stockcharts.com).

HUI Index chart - Gold Bugs, Mining stocks

Let’s start with the two details that didn’t change recently – the weekly sell signal from the Stochastic indicator and the fact that the HUI Index only rallied up to the 50% Fibonacci retracement level of the previous decline, which makes it similar to the 2012-2013 rally that preceded the huge decline.

That’s not the first time when gold stocks moved to the 50% retracement – we saw the same thing at the beginning of the year. Back then the weekly Stochastic indicator also flashed a sell signal.

So why would miners start a huge decline now, if they didn’t manage to do so when the same signals were seen previously?

The price factor and the signals based on it are indeed the same, but time is different now. If the analogy to the 2012-2013 is indeed in place, then it’s no wonder that the decline didn’t start much earlier this year – the time wasn’t right. We connected the 2011 and 2012 tops with a red, dashed line and copied this line to the 2016 top. In this case, the HUI Index didn’t move as high as it did in 2012, but the rally ended at almost the same time.

Consequently, we now have not only the price that is right for the final top before the slide, and the confirmation from the weekly Stochastic indicator, but we also have the right time – that’s what makes the current case different.

There is also an analogy to the 2008 rally and subsequent decline, less visible at first sight (we’ll discuss it in greater detail in future alerts), but still important. The distance between the tops was different back then than it is now, but the pace of the decline between them was almost identical (compare the dashed lines connecting them). That’s yet another reason to believe that the most recent top in the HUI Index was indeed the final one and that much bigger declines are to follow.

In yesterday’s alert, we wrote the following about gold’s long-term chart:

It seems that the final gold slide has just begun. The blue dotted line represents the analogy to the 2012-2013 decline. However, if the USD Index does indeed start a major rally (and we expect it do to so), then gold’s decline could be sharper than the decline that we saw in 2012 and 2013, as back then the USD Index didn’t rally substantially. Consequently, the 1:1 analogy between them could work for prices, but not necessarily in terms of time. In other words, the breakdown could be sharper and the bottom could be seen sooner.

Therefore, we updated the target price – it’s based on the above along with the declining red support line (based on the previous lows, and the key 61.8% Fibonacci retracement level. Moreover, the target fits the theory according to which gold should move low enough to scare even the most hardcore gold bulls – a move to $1,000 or even a bit below it might not do it. However, gold at $900 or a bit below, should do the trick.

The dashed, green line on the above chart represents the analogy to the 2012-2013 slide. If the decline is to be sharper, we should expect gold stocks to decline below this line. There was only one other case when gold stocks dropped substantially that could give us some guidance (and as you’ll see in one of the following alerts, this analogy is more important that it seems at first sight) – the 2008 slide. We copied it to the current situation, which creates a zone through which gold stocks are likely to move lower. Both analogies also create a target area around the 2001 top – the 80 level (between 70 and approximately 88). Before discarding these levels as ridiculous, please note that anything below 200 also seemed ridiculous in early 2008 after the HUI moved above 500 – and yet, these levels were seen later the same year.

Summing up, there are more and more long-term signs pointing to a big decline in the precious metals sector – even the palladium market provides us with a strong sell signal. The implications of the August record-breaking volume in gold, the analogies to 2013 and the short-term sell signals (including this week’s breakdowns) all confirm the bearish outlook. Moreover, the analogies in gold stocks suggest that a big and sharp slide is just around the corner.

Earlier this month, we wrote that many people were acting like $1,300 was the new $1,900. Today, we can say the same thing based on what has happened since Labor Day – gold has declined quite visibly, however, it seems that the current decline is not yet fully analogous to what happened back in 2011 – the volatility factor is still missing. We expect it to fully kick in once the USD Index shows at least some more strength – this little strength is likely to lead to significant strength in the following days and weeks as it will imply a breakout. It is then when gold and silver could truly plunge. This could happen in a week or two, but it could also happen later today. $1,300 is the new $1,900.

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

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): Short positions (150% of the full position) in gold, silver and mining stocks are justified from the risk/reward perspective with the following stop-loss orders and initial target price levels / profit-take orders:

Gold: initial target price level: $1,063; stop-loss: $1,366; initial target price for the DGLD ETN: $81.88; stop-loss for the DGLD ETN $38.74
Silver: initial target price: $13.12; stop-loss: $19.22; initial target price for the DSLV ETN: $46.18; stop-loss for the DSLV ETN $17.93
Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $26.34; initial target price for the DUST ETF: $143.56; stop-loss for the DUST ETF $21.37

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: $45.31
JDST ETF: initial target price: $417.04; stop-loss: $43.12

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

Insurance capital (core part of the portfolio; our opinion): Full position

Important Details for New Subscribers

Whether you already subscribed or not, we encourage you to find out how to make the most of our alerts and read our replies to the most common alert-and-gold-trading-related-questions.

Please note that the in the trading section we describe the situation for the day that the alert is posted. In other words, it we are writing about a speculative position, it means that it is up-to-date on the day it was posted. We are also featuring the initial target prices, so that you can decide whether keeping a position on a given day is something that is in tune with your approach (some moves are too small for medium-term traders and some might appear too big for day-traders).

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 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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