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.

In the last few alerts, we thoroughly discussed the situation in the precious metals market, explaining the likelihood of seeing reversals, and pointing to confirmations of such reversals, once they have indeed taken place. The points that we made in those alerts remain up-to-date, but it might appear that one thing changed. That’s mining stocks strength relative to gold and that’s what we’ll focus on in today’s analysis.

However, before moving to mining stocks, let’s take a quick look at what happened in metals (chart courtesy of http://stockcharts.com).

Gold and Silver Erase Earlier Rallies

In short, the reversal was followed by substantial daily declines and daily closes below Tuesday’s closing price, which means that Wednesday’s daily rally was completely erased. The volume was not bigger than the volume that accompanied the reversal, but it was still significant, so everything is in order in that regard. The volume confirms that there was indeed a major reversal and that the prices are now likely to move lower.

Both markets point to the next reversal close to the end of the April, though silver may bottom sooner due to its self-similar pattern. Just as the white metal declined in a sharper manner in early December, it could get ahead of itself during this decline. It’s not a sure bet, but it shouldn’t surprise us.

USD Index Verifies Breakout

Before moving to mining stocks, we would like to provide you with a quick update on the USD Index. In the previous alerts, we wrote the following:

(…) the USD Index is practically at the declining support line, so it might be the case that the move higher in the EUR/USD and the move lower in the USDX is just a verification of the late-March breakout. The move back below the 50-day moving average along with sell signals from the indicators paint a bearish picture, but the mentioned support line could stop the decline.

Yesterday’s reversal was seen not only in the precious metals sector, but also in the USD Index. Interestingly, the USD Index reversed right after touching the declining support line. It seems that the late-March breakout was just verified. This bodes well for the USD Index’s medium-term future and the opposite is the case for the precious metals market.

Based on yesterday’s rally, the mentioned scenario seems even more likely. The decline seems to have been just a verification of a breakout. Its implications are therefore bullish, not bearish. Naturally, the opposite is the case for the PMs.

Mining Stocks’ Strength

Miners held up very well during yesterday’s session, despite severe declines in gold and silver, so the question is if this makes the outlook somewhat bullish.

Gold and silver closed below their Tuesday’s closing prices, but GDX ended yesterday’s session visibly above its Tuesday close. Why would this be the case?

The general stock market moved higher, but the rally was not huge enough to justify the move by itself. But there might be another kind of relationship that’s in play here.

Mining stocks were one of the weakest sectors in the past 2 years and it’s quite often the case that the weakest parts of a given market outperform near important tops. Consequently, perhaps yesterday’s relatively strong performance of mining stocks was a sign of a topping stock market. If the general stock market slides today and/or next week, we’ll know that it was true, but it’s too early to say so with confidence right now.

We can say, however, that the outperformance is in agreement with the previous small, local rallies. In fact, even though GDX moved to its February high, the gold stocks to gold ratio didn’t move close to it. So, should we be really concerned about the miners’ strength? Not really – it’s not visible in any other term except for the very short term, and it would take additional confirmations for this signal to become something very important.

Summary

Summing up, it seems that we have just seen a major reversal in the entire precious metals sector, which is confirmed not only by significant price movement, but also by huge volume levels. The fact that it happened during the triangle-apex-based reversal week makes it highly likely that yesterday’s reversal was the reversal that starts a big decline in the precious metals sector. Yesterday’s strength in mining stocks doesn’t seem to be anything more than a temporary and local development. If miners continue to show strength, it might change the outlook, but it’s not the case at this time.

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: $1,218; stop-loss: $1,382; initial target price for the DGLD ETN: $53.98; stop-loss for the DGLD ETN $37.68
• Silver: initial target price: $14.63; stop-loss: $17.33; initial target price for the DSLV ETN: $33.88; stop-loss for the DSLV ETN $21.48
• Mining stocks (price levels for the GDX ETF): initial target price: $19.22; stop-loss: $23.54; initial target price for the DUST ETF: $39.88; stop-loss for the DUST ETF $21.46

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: $36.14
• JDST ETF: initial target price: $94.88 stop-loss: $41.86

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.

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Thank you.

Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager

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