Briefly: in our opinion, full (250% of the regular size of the position) speculative short position in gold, silver, and mining stocks is justified from the risk/reward perspective at the moment of publishing this Alert.
Yesterday’s session was very interesting (and profitable for our Forex Trading Alerts subscribers), but it was not particularly exciting when it comes to the precious metals market. At least not at the first sight. Gold, silver, and miners have barely moved despite the big daily rally in the USD Index. This appears to be a bullish sign and the one that today’s strength seems to confirm. Will we see another rally in the PMs before the big plunge?
In short, that’s possible, but not inevitable. And if it happens at all, the rally is most likely not going to be anything significant. We already discussed this possibility in our previous Alerts, so the one thing that we would like to elaborate now on is the specific situation in the gold-USD link. Namely, why it isn’t extremely bullish for gold that it didn’t decline yesterday despite the big rally in the USDX. Normally, if gold doesn’t react to an event that should cause it to rally, it’s bearish. Conversely, if gold doesn’t react to an event that should cause it to decline, it’s bullish.
Gold didn’t decline yesterday, even though a rally in the USDX is a bearish sign, so the implications for gold should theoretically be bullish – and profoundly so, as the size of the rally in the USDX was significant.
So, what really happened?
The ECB surprised the market with dovish news. This is bearish for the euro. This can impact the gold price in at least two ways:
- The decline in the euro is a bullish factor for the USD Index, due to huge weight of the EUR/USD exchange rate in the index (it’s over 50%). Rising USD Index should cause gold prices to decline. So, the above is bearish for gold.
- The dovish comments from the ECB mean weaker value of the euro relative to other currencies. Gold could be viewed as a currency here. As people get out of the euro, they move their capital to other currencies, including the US dollar, and gold. Therefore, this could increase the value of gold, mostly when viewed from the non-USD perspective. Overall, this may be bullish for gold.
It seems that gold’s reaction fell somewhat between both interpretations – it was mixed, but gold leaned more toward the second interpretation (i.e. gold acted more as a currency than a commodity yesterday), which is more clearly visible based on today’s pre-market move.
What does it mean? Nothing. And more precisely, it means that there are no direct implications of yesterday’s strength in gold relative to the USD Index. If the rally in the USD Index was caused by the strength of the US currency on its own, gold’s lack of decline would have been bullish. But, the USD Index rallied because of the weakness of the euro, not because of the strength of the USD, and therefore gold’s reaction was quite normal.
Surely, gold moved higher today, but it’s well in tune with what might have happened simply based on the technical reasons and the sharpness of the most recent downswing. We previously explained that the very short-term is not particularly clear and that the medium-term is so extremely bearish that it justifies a big short position anyway. And this remains up-to-date.
The USD Index moved above the previous highs, but only slightly. If it invalidates the breakout, then gold would likely rally to $1,310 or so (and silver might move to $15.20-$15.30 or so) before turning south once again. If the USDX continues to show strength and verifies the breakout, then gold, silver, and mining stocks would be likely to catch up with it, just like they had many times in the past.
The next short-term upside target for the USDX is at about 98.5 – approximately a full index point above the current USDX value. This is more than enough to trigger a substantial move lower in the PMs.
The above-mentioned scenario is just one of the possible ways in which gold might move lower from here. It’s more important that gold IS likely to decline far, than HOW precisely it happens. And we prepared you for the upcoming decline, so it will not surprise you when it happens, like it will surprise many gold investors and traders.
Summary
Summing up, it’s almost certain that the next big move lower has already begun and that the 2013-like slide is in its early stage. Based on the updated version of the 2013-now link, the implications are even more bearish than we had initially assumed. The downside target for gold remains intact ($890), but it seems that the price moves in silver and mining stocks will take them even lower than we had originally thought. A move below $9 in silver, and a move to or below 80 in case of the HUI Index (perhaps much lower on a very temporary basis) are not out of the question.
In other words, the precious metals market is likely to erase everything that it had gained in the last several days, weeks, and months, and then decline much more before THE bottom is in.
Even if the USD Index fails to rally here and consolidates some more, we don’t expect any significant strength in the precious metals sector. We may see some brief relief, but anything more than short-term hints at strength is very unlikely.
As always, we’ll keep you – our subscribers – informed.
To summarize:
Trading capital (supplementary part of the portfolio; our opinion): Full short position (250% of the full position) in gold, silver, and mining stocks is justified from the risk/reward perspective with the following stop-loss orders and exit profit-take price levels:
- Gold: profit-take exit price: $1,062; stop-loss: $1,357; initial target price for the DGLD ETN: $82.96; stop-loss for the DGLD ETN $39.87
- Silver: profit-take exit price: $12.32; stop-loss: $16.44; initial target price for the DSLV ETN: $47.67; stop-loss for the DSLV ETN $23.68
- Mining stocks (price levels for the GDX ETF): profit-take exit price: $13.12; stop-loss: $24.17; initial target price for the DUST ETF: $76.87; stop-loss for the DUST ETF $15.47
Note: the above is a specific preparation for a possible sudden price drop, it does not reflect the most likely outcome. You will find a more detailed explanation in our August 1st Alert. 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 target prices:
- GDXJ ETF: profit-take exit price: $17.52; stop-loss: $35.67
- JDST ETF: initial target price: $143.87 stop-loss: $30.97
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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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager
