Briefly: in our opinion, full (250% 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 other words, for the first time ever, we are increasing the position size to 250% of the regular position.
Not much happened in the precious metals market at first sight, but this time the first look is misleading. Just because not much happened, it doesn’t mean that nothing changed. Conversely, we saw new signals that were important enough for us to change our current trading position. But it’s not something you’ll read about in the popular financial media.
The thing is that the very subtle signs are visible only to those who know where to look. And financial journalists (who are not experienced analysts) generally don’t know where to look. If there is a major move in any direction, they try to find something that might have caused it and describe it in greater detail – but this is retrospective and doesn’t have significant (if any) predictive power.
What does have this power are signs that have been proven to work over and over again that are confirmed by many other similarly effective signs.
That’s what we saw yesterday. In the previous Alerts, we described the bearish implications coming from days when silver outperformed gold while miners underperformed it. Let’s take a look at the chart below (charts courtesy of http://stockcharts.com).
We saw it once again yesterday and the strength of this bearish signal is now very substantial.
That was also the third consecutive close below the 61.8% Fibonacci retracement level in the HUI Index and this means that the breakdown is fully confirmed. This makes the outlook strongly bearish for the short- and medium term.
The new and clear signal that we saw was gold’s very weak reaction to USD Index’s daily decline.
The USD Index declined and it would be natural for gold to rally in this case. But it didn’t manage to form even a small rally. To be clear, there was an intraday move higher in gold, but nothing more. This move was quickly erased and ultimately – based on kitco.com’s prices – gold ended the day lower than on Friday. This is a very bearish confirmation that comes on top of multiple bearish signals and breakdowns.
This means that yesterday’s session provided us with yet another very important indication of what’s to come. The clarity increased and the risk therefore declined, improving the risk to reward ratio. This is the cherry on the precious metals’ bearish analytical cake and – as crazy as this may sound – it seems to make an even greater short position justified than we had up to this point.
Not much more happened and what happened was not particularly important, so we don’t have much more to add today except for the above.
Summary
Summing up, the outlook for the precious metals sector is extremely bearish and based on yet another strong bearish sign from the relative performance of the miners, gold, and silver, the confirmation of the breakdown in the HUI, and gold’s clear weakness with regard to the USD Index’s movement, the outlook has further deteriorated. Consequently, for the first time ever, we are increasing the size of the current short position to 250% of its regular size.
Naturally, the above doesn’t mean using all of one’s capital for this position – it simply means using more than one would have used under normal bearish circumstances. You can find more details on our portfolio research and position sizing in general in the above links.
As always, we will keep you – our subscribers – informed.
To summarize:
Trading capital (supplementary part of the portfolio; our opinion): Full short positions (250% 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 profit-take price levels:
- Gold: profit-take exit price: $1,062; stop-loss: $1,272; initial target price for the DGLD ETN: $82.96; stop-loss for the DGLD ETN $46.38
- Silver: profit-take exit price: $12.72; stop-loss: $16.46; initial target price for the DSLV ETN: $46.97; stop-loss for the DSLV ETN $24.07
- Mining stocks (price levels for the GDX ETF): profit-take exit price: $13.12; stop-loss: $23.64; initial target price for the DUST ETF: $80.97; stop-loss for the DUST ETF $20.87
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: profit-take exit price: $17.52; stop-loss: $34.82
- JDST ETF: initial target price: $154.97 stop-loss: $42.78
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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And so it happened. After a breakdown that might have appeared accidental as it was triggered mostly by one company’s decline, we saw a weekly close below the key 61.8% Fibonacci retracement level in the HUI Index. There was no analogous breakdown to new lows in gold and silver, but what happened in these markets on a relative basis was even more significant.
Gold Stocks’ Breakdown, Platinum’s Invalidation, Gold’s CoT and Seasonality
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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager
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