Briefly: in our opinion, full (250% 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.
Not much happened on the precious metals market yesterday, so today’s Alert is going to be quite short. There are two things that are currently noteworthy (naturally, in addition to the factors that we discussed previously).
One thing is that the mining stocks declined even though gold didn’t do much and the general stock market moved higher. Miners’ underperformance is a bearish sign, but since its scope wasn’t significant, the implications are not significantly bearish either. What does it mean? Well, it doesn’t change much. We got a moderately strong confirmation of the bearish outlook, while no additional confirmation was necessary as the strength of the medium-term factors pointing to lower PM prices in the upcoming weeks has already been very significant.
The second thing that we would like to point out is gold’s inability to rally despite the increased geopolitical tensions regarding the Ukraine. The country is strongly considering introducing the martial law for the first time since the tensions between Ukraine and Russia reached zenith when the latter took over Crimea. The reason is that the Russian forces have seized three Ukrainian ships. The Russia’s official comment is that they had the right to do so, while the Ukraine (and the Western countries in general) claims that they didn’t have this right. The key takeaway is that the tensions have substantially increased and this means that gold should have reacted by moving higher on safe-haven demand, just like it did when before Crimea’s annexation several years ago.
Back then we argued that the impact on the price of gold was likely temporary even though there were many voices that it was the trigger for gold’s new bull market. Gold is now visibly lower than it was back then even though Crimea stayed with Russia and we have new tensions right now. What does it tell us now? It tells us that gold definitely doesn’t want to move higher. In fact, these tensions might have been the only reason due to which gold still hasn’t declined in a meaningful way. But, as it was the case previously, also this time, the impact of the geopolitical events is likely to be only temporary. And if this time the only thing that the tensions were able to trigger was a continuation of the pause, then when they subside, gold is likely to slide and the same goes for the rest of the precious metals sector.
Summing up, the outlook for the precious metals market remains very bearish for the following weeks and months and short position remains justified from the risk to reward point of view, even if we see a few extra days of back and forth trading or even a small brief upswing. It is a very high probability of a huge downswing that makes the short position justified, not the outlook for the next few days. It seems that our big profits on this short position will become enormous in the future and that we will not have to wait for much longer. Gold’s inability to rally on the increased geopolitical tensions confirm this scenario.
As always, we’ll keep you – our subscribers – informed.
To summarize:
Trading capital (supplementary part of the portfolio; our opinion): Full short positions (250% of the full position) in gold, silver and mining stocks are 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: $1,257; initial target price for the DGLD ETN: $82.96; stop-loss for the DGLD ETN $49.27
- Silver: profit-take exit price: $12.32; stop-loss: $15.11; initial target price for the DSLV ETN: $47.67; stop-loss for the DSLV ETN $28.37
- Mining stocks (price levels for the GDX ETF): profit-take exit price: $13.12; stop-loss: $20.83; initial target price for the DUST ETF: $80.97; stop-loss for the DUST ETF $27.67
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 1 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: $31.23
- JDST ETF: initial target price: $154.97 stop-loss: $51.78
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
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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
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