Hidden Clue from the Gold-USD Link

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Briefly: In our opinion, full (150% 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. We are moving the stop-loss level in gold higher – to $1,353.

The USD Index moved sharply lower yesterday and before it moved back up, it caused gold’s price to move above the previous 2018 high. What can we infer from this specific action in the gold-USD link?

While it doesn’t change much regarding the outlook for the upcoming weeks, it does indicate that gold is still vulnerable to moves in the currency market. Well, gold can never be entirely independent from the above as it is priced in currencies and thus if the value of a given currency erodes, gold has to move up in value over time (all other things being equal). Still, that’s not what we mean here. In this case, we mean the very short-term link that can either make gold move significantly in light of an average move in the USD, or it can make gold not move at all.

Gold’s way of reacting changes over time and it usually takes gold between a week and a few months to change its attitude toward the USD Index’s movement. Consequently, even if the current period of gold’s way of reacting (it does react) to the USD’s price swings is coming to an end, we should still assume that it could be in place for a day or a few.

It means that gold is vulnerable to a quick upswing in case of a quick downswing in the USD. The latter is not very likely and it doesn’t have to take place at all, but it’s something worth keeping in mind. We saw multiple bearish factors and we saw mining stocks bounce off the rising support/resistance line despite gold’s temporary strength. Therefore, the outlook remains bearish, but a short-term upswing in the price of the yellow metal – even a bit above the previous highs – should not surprise us or make us think that something major happened.

Naturally, something major might happen, but in this case, we’ll send an alert with details.

Let’s take a look at charts to see what exactly happened yesterday, starting with the USD Index (chart courtesy of http://stockcharts.com).

Short-term US Dollar price chart - USD

The USD Index declined and reversed yesterday, closing a bit lower, but not close to this year’s lows. During the intraday decline, however, it did move close to these lows. How did gold react?

Short-term Gold price chart - Gold spot price

Even though gold didn’t close above the previous highs, it did move above the previous intraday ones. We already commented on the above move yesterday as it was taking place when we were writing the alert:

Today’s comeback to $1,325 or so doesn’t invalidate the above [bearish comments]. Both: April and June tops in 2017 were followed by a quick rally that didn’t change the overall trend. Consequently, today’s pre-market strength is not an anomaly – it can be viewed as something normal.

So, again, the outlook remains bearish, but another quick upswing remains a possibility. If it materializes, it will most likely be followed by another slide shortly.

The implications of the other comments that we made yesterday on the above chart remain up-to-date as well:

On the above chart, we see that gold is almost at its short-term turning point. This has bearish implications as the preceding move has definitely been up. Both useful indicators: RSI and Stochastic, point to lower gold prices in the upcoming weeks.

Let’s take a look at the RSI’s performance in greater detail. It had been trading above 70 for over a week, even moving temporarily to about 80, but then it moved visibly down. There were only two similar cases in the recent past: the April 2017 top and the September 2017 top. If the following action is going to be similar to the April slide, we can expect gold to move below $1,250. If the following action is going to be similar to the slide following the September top, we can expect gold to move to about $1,210. Either way, the implications are bearish.

The volume was high during yesterday’s upswing, but it doesn’t have bullish implications. The reason is that gold declined before the end of the session and that made the entire day look more like a reversal than like a real rally. Big volume is a bearish factor when it accompanies a reversal.

- So, if gold could rally higher, wouldn’t it be better to close the current short position and get back to it at higher levels?

Not necessarily. “Could” is far from “likely” and even further from “imminent”. If a decline is seen instead, it could be sharp and a big part of the downswing could be missed in this case. There are many signs pointing to lower precious metals’ prices, so the situation is not symmetrical – it’s bearish. Consequently, it seems better to be prepared for a sudden move higher, but at the same time prepared to take advantage of the downswing.

Long-term Gold price chart - Gold spot price

Besides, the upside seems very limited as the declining, long-term resistance line is very close and a breakout above it is very unlikely.

Short-term Silver price chart - Silver spot price

HUI Index chart - Gold Bugs, Mining stocks

Silver and gold mining stocks didn’t confirm gold’s strength. The white metal moved higher by a mere 2 cents and while the HUI Index corrected about half of its previous decline, it was not close to the previous 2018 highs.

Moreover, the HUI closed the session visibly below the rising support/resistance lines, so technically, nothing bullish took place.

GDX - Market Vectors Gold Miners - Gold mining stocks

The price – volume link provides us with bearish indications. In the previous two days, the GDX ETF declined on volume that was higher than what we saw during yesterday’s upswing. This serves as a bearish sign.

Summing up, the medium-term outlook for the precious metals market remains bearish as confirmed by multiple factors, and based on the most recent short-term factors, it seems that the corrective upswing in gold, silver and mining stocks is already over. The mining stocks’ underperformance of gold, along with the fact that the GDX topped during the first session of the year, suggest that the decline is already underway.

Still, if the USD Index declines in the short term, gold could respond by moving higher, just like it did yesterday. That’s something we should keep in mind. This would most likely not be anything important and, in a few weeks, it would seem like a blip on the radar screen. If the situation appears otherwise – we’ll let you know.

In light of the above, we are moving the stop-loss levels for gold a bit higher.

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

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): Full 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:

Gold: initial target price: $1,218; stop-loss: $1,353; initial target price for the DGLD ETN: $53.98; stop-loss for the DGLD ETN $39.28
Silver: initial target price: $14.63; stop-loss: $17.62; initial target price for the DSLV ETN: $33.88; stop-loss for the DSLV ETN $21.78
Mining stocks (price levels for the GDX ETF): initial target price: $19.22; stop-loss: $26.14; initial target price for the DUST ETF: $39.88; stop-loss for the DUST ETF $19.78

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: $27.82; stop-loss: $38.22
JDST ETF: initial target price: $94.88 stop-loss: $37.78

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

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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