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.
Today’s Alert is going to be quite short and the reason is that practically nothing changed based on yesterday’s price moves. Let’s jump right into charts for details.
Gold, silver and mining stocks moved higher, but there were no meaningful breakouts. The HUI Index showed daily strength right after showing daily weakness so overall we saw nothing new taking the last few trading days into account. Silver didn’t manage to move to the previous highs, but it’s not really surprising given the breakout in the gold to silver ratio and the fact that silver declined right at its triangle-vertex-based reversal. Gold’s performance was somewhere in between the performance of miners and silver. It moved higher, but not significantly so, which doesn’t change anything.
In case of the USD Index, we saw a small move below the triangle pattern, but it was too tiny to be considered meaningful. If we based the lower border of the triangle on the second December intraday low, there would be no move below it at all. Consequently, even the short-term outlook for the USDX didn’t change based on what just happened.
Since the prices have basically moved to where they just were a couple of days ago, nothing changed on the long-term charts either. Consequently, we have practically nothing to add to what we already wrote in the previous several days.
The market may be hesitating to move before the Fed’s interest rate decision, or we could see a quick, intraday, expectations-based panic that could temporarily move the market either higher or lower. There would be no direct explanation as to why these moves happened, except investors’ and traders’ nervousness, and it’s usually best to just ignore these very short-term price moves and focus on the strong signals that were in place beforehand. We discussed them in the previous Alerts, so you are both: informed, and prepared. In particular, please note that yesterday’s analysis includes our comments on the possible outcomes based on the Fed’s decision and the strategy that seems optimal given these scenarios. If you didn’t have a chance to read it yet, we strongly suggest that you do so today.
The sentiment is strong (as shown on the chart featured in yesterday’s Alert) and it will therefore probably be particularly tempting to either drop the short position or to even go long. Based on the cold-facts analysis that would not be a good idea and ultimately it is the latter that creates value over time, not following emotions on the market and chasing the price. Even though gold is well below its 2011 high, on a short-term basis it’s high and it’s usually not a good idea to buy high – we want to buy low, possibly extremely low and there are strong signs suggesting that this buying opportunity is coming. Sometimes the sitting instead of trading is the toughest choice that an investor has to make and it seems that this is one of those cases.
Summary
Summing up, this prolonged correction within the big downtrend has been very tiring, but based on the long-term factors being patient was very well worth it, and based on the short-term signs, it seems that the waiting is over or about to be over. The outlook for the precious metals market remains very bearish for the following weeks and months and short position remains justified from the risk to reward point of view, even if we see a few extra days of back and forth trading or even a small brief upswing. There is a very high probability of a huge downswing that makes the short position justified, not the outlook for the next few days. It's confirmed by multiple factors, i.a. weekly reversals, silver’s recent outperformance and reversal exactly when it was most likely, gold’s performance relative to the general stock market, USD’s self-similar pattern that’s confirmed by PMs performance, and many more.
As always, we’ll 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 $47.17
- Silver: profit-take exit price: $12.32; stop-loss: $15.11; initial target price for the DSLV ETN: $47.67; stop-loss for the DSLV ETN $28.37
- Mining stocks (price levels for the GDX ETF): profit-take exit price: $13.12; stop-loss: $20.83; initial target price for the DUST ETF: $80.97; stop-loss for the DUST ETF $24.87
Note: the above is a specific preparation for a possible sudden price drop, it does not reflect the most likely outcome. You will find a more detailed explanation in our August 1 Alert. 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: $17.52; stop-loss: $31.23
- JDST ETF: initial target price: $154.97 stop-loss: $51.78
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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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager
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