Briefly: in our opinion, full (250% of the regular size of the position) speculative short position in gold, silver, and mining stocks is justified from the risk/reward perspective at the moment of publishing this Alert.
Gold has bounced off its daily lows yesterday. Neither silver has been at its weakest. Have we seen some kind of a short-term bottom? A look at gold miners and USD Index tells us all we need to know. These valuable clues are serving as a fitting answer. What has changed, actually?
Let's take a look at the details. We'll start with gold and follow up with silver.
Gold and Silver Update
The yellow metal reversed after moving to the support provided by the neck level of the head-and-shoulders formation. The reversal by itself is a bullish phenomenon, but there are two main reasons due to which, we are not going to act on it (at least not without additional bullish signs).
The first reason is the similarity to the June 2018 situation that we discussed more thoroughly on Friday and that we marked with the blue arrow. Gold's back-and-forth movement is normal at this time. In 2018, the four days after the sizable daily drop were: tiny bearish reversal, volatile back and forth session, and two bullish reversals, during which gold declined in terms of daily closing prices.
Immediately after the big daily April decline, we saw a tiny bearish reversal, and then we had yesterday's session, which is a bullish reversal where gold declined in terms of daily closing prices. It's in perfect tune with the way gold declined last year, thus the bullish reversal at this time should not be taken at its face value.
The second reason is that even if gold did move higher from here, it would most likely not go beyond the declining resistance line that's at about $1,305 right now. The upside potential here is therefore very limited.
The extra reason is the proximity of gold's cyclical turning point. Even if gold would move to the declining resistance line right now, thus forming a short-term rally, in light of the turning point, it would most likely just be a superb shorting opportunity.
As far as silver is concerned, we have three major points to make:
- Silver moved higher yesterday, but the move was so small that overall the decline is still perfectly similar to the pace of decline from August 2018 as indicated by the dashed, blue lines.
- Taking the last 2 trading days into account, gold and mining stocks are down in terms of closing prices, but silver is up. That's the very short-term outperformance that we tend to see right before big declines.
- Silver's reversal might seem encouraging on a day-to-day basis, but looking at the price levels, we see that the white metal simply verified the breakdown below the $15 level.
The last point can be seen more clearly on the intraday chart.
Silver made a few quick attempts to break above $15 and it failed in each case.
All 3 above-mentioned points are bearish.
Checking the Miners
Gold miners reversed at their rising support line, but if we take the last two days into account, they are still lower. Gold miners reversed from the current levels several times in the last couple of weeks, so it's no wonder that gold stock bulls went long once again, especially that the support provided by the proximity of previous lows was reinforced by the rising dashed support line.
Based on how the situation looks like in gold and silver, it's doubtful if miners will be able to generate any meaningful rally here. Even in the unlikely case, where gold moves to about $1,305 and then tops, it doesn't seem that miners would move far. 171 - 172 seems to be the maximum realistic upside.
If the situation in gold and silver was different, it might have been a good idea to adjust the short positions at this time - but it isn't.
And that is the case even without taking the USD Index into account. The important thing about the USD Index is...
The Hint from the USD Index
Is that the USDX seems to have bottomed or is extremely close to bottoming. The index closed the day a bit lower, but there was no new intraday low. This is a bullish indication, and given the proximity of the rising medium-term support line, the bottom might already be in.
Bottoms are likely to form once the price reaches the support and this may very well be the case also here. In this case, the USDX would first decline to 95.75 before rallying. However, let's not forget that the current situation in the USD Index is similar to the January - April 2008 bottom that looked like an incomplete head-and-shoulders pattern. Back then, the USDX bottomed above its support lines, so something similar might happen (or has already happened) now, too.
Summary
Summing up, the USD Index appears to be bottoming, while gold, silver and mining stocks are on a verge of breaking below important support levels, which is a powerful bearish combination. In fact, this is exactly the kind of set-up that could trigger the acceleration in metals' and miners' decline. Based on the likelihood of seeing a temporary turnaround in the next 1-3 weeks, we might have a good chance of exiting the current short position or even switching to a long one at that time.
As always, we'll keep you - our subscribers - informed.
To summarize:
Trading capital (supplementary part of the portfolio; our opinion): Full short position (250% of the full position) in gold, silver, and mining stocks is justified from the risk/reward perspective with the following stop-loss orders and exit profit-take price levels:
- Gold: profit-take exit price: $1,252; stop-loss: $1,357; initial target price for the DGLD ETN: $50.97; stop-loss for the DGLD ETN $39.87
- Silver: profit-take exit price: $14.11; stop-loss: $15.72; initial target price for the DSLV ETN: $36.97; stop-loss for the DSLV ETN $26.97
- Mining stocks (price levels for the GDX ETF): profit-take exit price: $20.41; stop-loss: $24.17; initial target price for the DUST ETF: $24.28; stop-loss for the DUST ETF $15.47
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: $29.62; stop-loss: $35.67
- JDST ETF: profit-take exit price: $52.32 stop-loss: $30.97
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
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
