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.
At the first sight not much happened on the precious metals market yesterday. However, taking a closer look reveals that both: gold and silver closed the session above their previous lows. At the same time, multiple other (no less important) developments were seen in the markets and ratios that are closely related to gold and silver. What are the implications of this invalidation in light of them?
In short, there are little implications of the invalidation, because the levels that were broken to the upside are just two of the nearby resistance levels and in light of all the other bearish signs, it doesn’t seem that this particular invalidation of a previous breakdown is a game-changer. Let’s take a closer look at the charts for details (chart courtesy of http://stockcharts.com).
Gold closed yesterday’s session above the May low and at the same time it closed below the rising red resistance line and 2 declining resistance lines – the sharpest one being based on the June highs in terms of daily closing prices. On one hand, the comeback above the May low is bullish, but on the other hand, since gold tried to move above the declining resistance line based on the closing prices and finally closed below it, the implications of yesterday’s session are also bearish. All in all, it doesn’t seem that we saw meaningful changes yesterday.
Silver moved above the December 2016 low, but it didn’t move above the May low and the $16 mark. Was this the invalidation of the breakdown below the former, or a part of the verification of the breakdown below the latter? It’s rather unclear at this time and any kind of interpretation would need to be supported by additional price moves.
The charts for gold and silver themselves are rather unclear at this time, however, this doesn’t mean that the general outlook for the precious metals sector is. There are multiple other things that also need to be kept in mind.
For instance gold’s performance in terms of currencies other than the US dollar.
Gold priced in the euro and in the Canadian dollar both feature major breakdowns. The gold price in the euro moved back up a bit, but it’s nothing extraordinary. In fact, we previously wrote the following about the above:
The price of gold in the euro broke not only below the neck level of this year’s head-and-shoulders pattern, but it also below the big, 2016-today pattern based on key 2016 lows. The implications for the following weeks are bearish – gold is likely to decline even if the USD doesn’t show strength (and the latter is likely anyway). However, the above chart also says that we could see a temporary move back to the mentioned levels that were recently broken. Should that be the case, it wouldn’t make the outlook bullish.
Despite a small correction, the major breakdowns remain in place and the implications are very bearish for the following weeks and months.
The gold to S&P 500 Index ratio also remains below the previous lows - the bearish implications thereof remain in place and our previous comments on it remain up-to-date:
(…) please note that the gold’s ratio to the general stock market is moving below its previous lows. The breakdown is not huge, but the ratio did move below the 2015 and 2016 lows. If the ratio closes the week visibly below them, we will have a major breakdown and a huge decline will become even more likely for the following weeks and months.
Interestingly, in case of the daily closing prices, the lowest level of this ratio that we saw in the recent years (before the current decline) was 0.4992 and it was reached on Dec 20, 2016. Yesterday, the ratio closed at 0.4990, so we have a tiny breakdown in terms of daily closing prices. Naturally, the breakdown is too small to be viewed as very important at this time, but if the ratio continues to move lower and closes the week visibly below the previous lows, the implications will be profoundly bearish.
Mining stocks moved higher initially, but erased most of their gains before the session was over and GDX formed a characteristic black candlestick (the intra-day move was down as the closing price was below the opening price, but if one compares the closing prices of the session and the previous one, it’s still a daily upswing). In the recent months, we saw similar candlesticks in mid-May (close to the end of the rally) and in late February (before the decline). The implications of yesterday’s session seem to be bearish.
In previous alerts we commented on the above HUI Index chart in the following way:
Gold stocks moved higher yesterday and the session’s candlestick is quite visibly bullish. Is there anything not to like about this “bullish” signal? A couple of things – let’s start with what’s visible on the above chart and that is that the possible upside target is very limited – the declining, rising and short-term declining resistance lines are very close, which would likely keep the rally in check, if one was to follow.
The other thing is that it was just one session of strength and one swallow doesn’t necessarily make a summer. Surely, one could argue that in the case of an invalidation of a breakdown, one session is enough to make a difference, but let’s keep in mind that the previous low is not the only thing that gold stocks broke below. Miners moved below the rising support line based on the previous important lows and this line was not invalidated and miners did not even move close to it.
Most importantly, however, we know how the HUI Index performed during the 2012-2013 decline.
It turns out that there were multiple daily rallies within the decline. Which one of them was worth taking action on? None of them. It was better to wait out the following small corrections and profit on the huge downtrend.
Naturally, one could say that the current decline is not like the 2013 decline, but last week’s action in silver suggests otherwise.
In yesterday’s trading, the HUI Index moved higher by less than 1 index point and the outlook didn’t change at all. Even if we see a move higher this week, it’s not likely to be anything significant and the big decline is likely to follow shortly anyway.
The upswing that we saw yesterday was definitely not significant – the nearby resistance lines were not touched, let alone broken.
Comparing gold stocks values with the one of gold provides us with yet another bearish sign. The ratio moved to its declining resistance line. This line already proved to be important several times this year, so it seems likely that it will be the case once again and that miners will start to underperform gold shortly. The latter is a bearish sign for the entire sector, so the overall implications are bearish.
Finally, the situation on the currency markets continues to favor lower precious metals prices in the coming weeks.
The weekly-closing-price-level-based resistance line is at hand and it doesn’t seem likely that the euro would close the week above it. The week is about to end, so it seems that the end of the rally is very close and that a turnaround is at hand.
Speaking of turnarounds, we fine-tuned the cyclical turning points in the USD Index (the nearby turning point was not really affected, though).
The most recent move in the USD Index was down, so the turning point has bullish implications for the US currency, which, in turn, is bearish for the precious metals sector.
Summing up, there are multiple important bearish signs in play that make the decreased clarity on gold and silver charts rather unimportant. As we had already written previously, we could see a bit higher prices in the coming days, but much lower prices in the coming weeks and months. Any strength here is likely to be just temporary.
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: exit-profit-take level: $1,063; stop-loss: $1,317; initial target price for the DGLD ETN: $81.88; stop-loss for the DGLD ETN $44.57
- 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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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager
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