Middle-Eastern Game-Changer – Or Is It?

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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.

During yesterday’s session gold, silver and mining stocks rallied significantly even though the USD Index was only modestly lower. Does this, along with the proximity of gold’s turning point, indicate that the bottom in the precious metals sector was just formed?

In short, it is something that should make one extra alert regarding the current developments, but it’s not necessarily a game-changer just yet. Do you recall the North-Korean scare and how gold was supposed to soar through $1,500 based on it? We argued that the impact of geopolitical events on gold was usually temporary and it turned out that we were correct – gold didn’t even rally through $1,400. Instead it moved back down. By the way, do you recall how gold was supposed to go through the roof base on the Russian annexation of Crimea in early 2014? As of today, Crimea hasn’t returned to Ukraine and the price of gold is visibly below the early 2014 levels – it’s more than $100 below the early 2014 top.

The reason that we mention the above is that yesterday’s price moves were most likely cause by the rather odd events in Saudi Arabia. The increased uncertainty regarding crude oil is something that stimulated the safe-haven demand for both precious metals and the USD, so yesterday’s performance of the above is rather natural, not something to call home about. The above appear to be a one-time event, so the impact could be very temporary.

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

Short-term US Dollar price chart - USD

The comment on the above chart will be rather short – nothing changed. Consequently, what we wrote previously remains up-to-date:

The breakout above the neck level of the reverse head and shoulders pattern is more than confirmed, so another rally appears very likely to be seen this week. The target at about 96 level (precisely 95.89) is supported by the declining red resistance line and the 38.2% Fibonacci resistance level. Both are based on a clearly visible, medium-term move, so they are important.

Short-term Gold price chart - Gold spot price

Gold moved above the declining resistance line and even managed to close above it. However, since that was just one closing price above it, we don’t view this breakout as confirmed, especially that at the moment of writing these words, gold is trading at about $1,275, so it could easily invalidate yesterday’s breakdown in just a minute or a few of them.

By the way, we were recently asked about the 3-day confirmation rule and why we use it and we think that sharing our reply with you might be useful:

Regarding the 3-day confirmation rule - we haven’t published an essay on this particular technique, but the explanation is that this is an experience-based adjustment to the classic 2-day confirmation technique. The general idea is that while 1 session could be manipulated or be highly affected by a more or less random (i.a. geopolitical) event, it’s highly unlikely that 2 subsequent sessions would be manipulated/affected in the same way. While in the former case, a breakout / breakdown could be accidental, if we saw 2 closes above/below a certain level, one could view the move as “real” and “confirmed”. That’s the theory and it may very well work in this way on some markets, but we noticed that even such 2-day confirmations are quite often invalidated and thus we added an additional day to the above requirement. Introducing it increased the accuracy of using breakouts and breakdowns as trading tools.

Short-term Silver price chart - Silver spot price

Silver soared once again and once again we are seeing a decline that follows an upswing – silver is already 18 cents lower today, being at about $17 at the moment of writing these words. Overall the white metal has been moving back and forth in the last few days and it doesn’t seem that the implications are particularly bullish.

HUI Index chart - Gold Bugs, Mining stocks

Gold stocks rallied, just as gold did, but they didn’t close the session back above the rising resistance lines based on the 2016 and 2017 lows and consequently nothing changed from the technical perspective. Lower prices are still likely to be seen in the following days based on the above chart.

Summing up, much less changed based on yesterday’ session than may appear at the first sight. Gold’s breakout is not confirmed and – likely – about to be invalidated, silver’s rally is also being invalidated and the technical situation in the USD and mining stocks didn’t change at all. Still, since precious metals moved higher while the USD didn’t decline much, the price targets in metals that will correspond to USD’s 96 level (95.89 to be precise) could be higher than we initially assumed. In yesterday’s alert we discussed the possibility of gold bottoming temporarily (!) at about $1,250 and based on what happened yesterday, this scenario became more probable (not certain enough to move the exit level to it just yet). It’s too early to determine the analogous price levels for silver and mining stocks (at least reliable ones), but keeping the 95.89 level for the USD Index in mind should prove most useful. Once the USD moves above 95.7 we will know what’s the closest important support in the case of metals and miners and we will most likely move our exit prices to these levels.

However, while yesterday’s session might have changed the very short-term targets, it didn’t change the medium-term outlook and thus what we wrote yesterday regarding that matter, remains up-to-date. Namely, it seems likely that after an additional decline the precious metals sector would be likely to correct before continuing the decline. This action would not be a bullish development from the medium-term point of view as it would be something natural at this stage of the decline and the opposite can be said about the upcoming pullback in the value of the USD Index. To be clear, the medium-term outlook remains bearish, especially that the analogy to the 2012-2013 decline remains in place and the previously discussed long-term signals remain in place: gold’s huge monthly volume, the analogy in the HUI Index, the analogy between the two most recent series of interest rate hikes, and the RSI signal from gold priced in the Japanese yen. However, it seems to be a good idea to take advantage of the upcoming short-term correction, should we get bullish confirmations from metals or miners.

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 exit price levels / profit-take orders:

Gold: exit price: $1,218; stop-loss: $1,366; exit price for the DGLD ETN: $51.98; stop-loss for the DGLD ETN $38.74
Silver: exit price: $15.82; stop-loss: $19.22; exit price for the DSLV ETN: $28.88; stop-loss for the DSLV ETN $17.93
Mining stocks (price levels for the GDX ETF): exit price: $21.23; stop-loss: $26.34; exit price for the DUST ETF: $29.97; 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 exit prices:

GDXJ ETF: exit price: $30.28; stop-loss: $45.31
JDST ETF: exit price: $66.27; 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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