Briefly: in our opinion, full (200% of the regular size of the position) speculative short positions in gold, silver and mining stocks are justified from the risk/reward perspective at the moment of publishing this alert.
Gold is moving back and forth around the $1,300 level without a decisive breakout or breakdown, while the cyclical turning point approaches in case of the mining stocks. How is the latter likely to impact the precious metals' prices given the unclear very short-term direction and amid increased tensions between USA and North Korea and in the light of renewed trouble in Europe?
In short, the turning point likely to trigger a decline, because – while the very short-term price moves are unclear – the most recent short-term move was up. This is especially the case because of the nature of the reason behind the most recent upswing is very temporary. In Friday’s Alert, we described the likely reason behind the very short-term move higher in the following way:
There was also a news-based factor as the meeting between USA and North Korea was cancelled. As a reminder, geopolitical events' impact on the price of gold is likely to be limited.
The same goes for the situation in Europe, more precisely in Italy. We explain the details in today’s Gold News Monitor, but in short, just as Reuters wrote, Italy's fresh election risks being referendum on euro.
All in all, we have more of the same – yet another geopolitical factor that increases the price of gold in the very short term but is not likely to trigger any sustainable strength. Before negating the above, please note that Russia took Crimea from Ukraine in early 2014 and gold is lower than it was at that time even though many commentators called for an inevitable rally in gold prices at that time. We explained that it didn’t have to happen and emphasized that the greatest pressure on the price of gold was when the uncertainty was at the highest levels. We didn’t have to wait long for the confirmation – the annexation became a fact, the tensions decreased, and gold declined. Just as this geopolitical event seems to be very bullish for gold, let’s keep in mind that its impact is very likely to be brief.
Technical factors, on the other hand, can, and are likely to result in major price moves as they represent shifts in investors’ sentiment, which can have lasting implications. Consequently, let’s take a look at the charts and check what’s in store for the next days and weeks.
Gold at its Resistance Line
We started today’s alert a bit later than usually as we wanted to provide you with the analysis that’s most up-to-date after the recent events in Italy. The US traders are back in their offices today and even though the session has not yet started in the US, if there was about to be a big impact on prices, we would most likely already have some meaningful signs thereof in the pre-market trading.
Yet, at the moment of writing these words, gold is trading at $1,303, which is more or less where it had closed last Friday and Thursday. Consequently, the technical outlook is just as we described it in Friday’s analysis and our previous comments remain up-to-date:
Gold rallied on volume that was the strongest (taking daily upswings into account) since the first half of April. This may seem bullish, but please note that back then the big-volume session marked the final top that preceded an almost $100 downswing. The strength of the resistance that was reached back then was bigger as it was based on more and more long-term tops, but the current resistance line is not weak either. Therefore, we may have just seen the final top this time as well. After all, the history tends to repeat itself to a certain extent.
Silver’s Upcoming Reversal
In the previous alerts, we wrote the following:
Before moving to mining stocks, we would like to point out the fact that there is a medium-term apex-based reversal close to the end of the month, so if the decline starts shortly (today or tomorrow), then we can expect to see another turnaround in a week’s time.
It’s already “the next week”, so it’s important to describe when is the reversal likely to precisely be based on the apex-based turning point. The answer is on June the 1st. This may seem very close, but since May is 31 days long, it means that it’s still a few days away. Will that be a bottom or a top? Before this week, it was very likely that it will be a bottom after a bigger decline. However, since PMs moved higher on geopolitical events, it could be the case that they will stay afloat for a few more days and decline in early June.
We know it’s tiring watching the markets move back and forth, but knowing that periods of very low volatility often precede the greatest volatility makes the waiting and paying attention to the seemingly boring market worth it.
Mining Stocks’ Turning Point
The volume on which GDX declined last Friday was higher than the one on which it had rallied last Thursday, which means that the overall implications are bearish. The true move appears to be down and the correction was to the upside.
Despite Friday’s daily downswing, however, the most recent short-term move was up, which means that the turning point that we have today has bearish implications. Since it is the first session, after which the US investors will be reacting to news from Italy, we could see some temporary strength. But, as we explained earlier, it doesn’t have to be anything major and it’s likely to be temporary. In fact, the reaction could be nothing more than just an intraday move.
The Gold-USD Link and its Implications
The most recent strength in the USD Index wasn’t accompanied by gold’s decline, but by a move higher. Gold rallied more visibly in comparison to other currencies, especially in comparison to the euro. This may make you wonder if one should view this as a sign of strength in the yellow metal. Indeed, it would have been the case, if gold was moving higher despite the strength of the US currency. But, it wasn’t essentially the strength of the US currency, but the weakness of other currencies (especially the euro) that caused the USD Index to move higher.
The USD Index is a weighted average of several currency exchange rates, the biggest of which is the EUR/USD. Obviously, there are two sides of the currency exchange rate and it can move because something changed regarding either one currency, or the other, or regarding both of them. In this case, it was not US economy’s strength that pushed USDX higher – it was EU-trouble.
Why does the above matter to us - precious metals’ investors?
Because we check the gold-USD link in order to check if gold is showing adequate strength or not. If it doesn’t, it means that it’s likely to change direction. The key word here is “adequate”. We want to compare gold’s performance to factors that should generate a certain response and they don’t. For instance, a major decline in the value of the US currency in light of growing unemployment should cause gold to rally. If it doesn’t, it means that gold doesn’t really want to move higher at this time and one might consider shorting it.
But, if there are problems in one the Eurozone’s biggest economies, then shouldn’t gold actually move higher as a risk hedge? Shouldn’t the USD rally as a risk hedge as well as being world’s key currency and it’s clear that some investors will prefer to move out of the euro in the light of increased risks surrounding it? Indeed, that’s what should take place and that’s what we saw: gold moved higher along with the USD Index, but the size of both moves was not significant.
Can we really speak of gold’s strength in the light of the above? No. It moved just like it should, and its reaction actually could have been much bigger. Therefore, we don’t think that there are bullish implications of the recent action in the gold-USD link.
Summary
Summing up, the most recent precious metals strength seems to be geopolitical-news-driven, which means that the implications are very likely only temporary. The technical picture for the precious metals’ market didn’t change and it remains bearish as we outlined in detail in the previous alerts. Based on the current medium-term trend and the strength of the signals that confirm it, along with the doubtful strength of the possible upswing before the decline, it seems that it’s justified to keep the current speculative short positions intact.
As always, we will keep you – our subscribers – informed.
To summarize:
Trading capital (supplementary part of the portfolio; our opinion): Full short positions (200% 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:
- Gold: initial target price: $1,251; stop-loss: $1,382; initial target price for the DGLD ETN: $48.88; stop-loss for the DGLD ETN $37.48
- Silver: initial target price: $15.73; stop-loss: $18.06; initial target price for the DSLV ETN: $27.58; stop-loss for the DSLV ETN $19.17
- Mining stocks (price levels for the GDX ETF): initial target price: $21.03; stop-loss: $23.54; initial target price for the DUST ETF: $28.88; stop-loss for the DUST ETF $21.16
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 – but 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: $30.62; stop-loss: $36.14
- JDST ETF: initial target price: $59.68 stop-loss: $40.86
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.
=====
Latest Free Trading Alerts:
Almost 5 500 miles (8 800 kilometers). That’s the distance between Pyongyang and Rome. It seems a lot, right? But not for gold, the truly global monetary asset. In recent days, the price of the yellow metal has immediately reacted to the developments around both North Korea and Italy. What has happened?
How Far Is from North Korea to Italy?
=====
Hand-picked precious-metals-related links:
PRECIOUS-Gold prices ease as strong dollar weighs on market
Australian Gold production falls 7 percent to 74 tons in Jan-Mar
Hedge funds have never been this bearish on platinum price
=====
In other news:
Stocks Slide as Italy's Political Crisis Trims Risk Appetite, Lifts Dollar
Euro zone money markets slash 2019 ECB rate-hike bets
European shares slide as Italian crisis reignites euro break-up fears
Italian voters brace for euro showdown ahead of snap elections
Indonesia seeks to tame market contagion as bets grow on Wednesday rate hike
Why Some Emerging Markets Are Suddenly Melting Down
Top North Korean officials travel to U.S., Singapore in summit preparations: media
=====
Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager
Gold & Silver Trading Alerts
Forex Trading Alerts
Oil Investment Updates
Oil Trading Alerts
