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.
The majority of the action that we saw in yesterday’s trading was before the markets opened in the U.S. and we had already been able to comment on it in yesterday’s alert and thus we don’t have much to add in today’s issue. In short, what we wrote yesterday remains up-to-date. There are, however, a few things that we would like to discuss. Let’s start with silver and mining stocks (chart courtesy of http://stockcharts.com).
The price action that we saw in the mentioned parts of the PM sector was rather insignificant yesterday. The question is: “How can we interpret it?” – were they outperforming gold suggesting strength? Not really. The general stock market simply rallied yesterday, which likely gave miners and silver a temporary boost as they are both more correlated with stocks than gold (miners are also stocks and silver has more industrial uses than gold, so the demand for it is somewhat dependent on various companies’ production).
In light of an over 1% increase in the stock market, it’s no wonder that neither miners nor silver declined substantially. Please note, however, that the general stock market’s impact on the precious metals sector is likely to be temporary.
Gold’s reaction was more visible, but still, we haven’t seen a huge decline that would be natural after Friday’s huge-volume reversal. It could be the case that the market is waiting for the uncertainty regarding the Jackson Hole Economic Symposium to decline, so the lack of a decline at this time is no bullish sign. The sellers seem to have won over the buyers on Friday, but both groups are not willing to act as long as the uncertainty remains high and thus we could see big price moves after the weekend.
Still, Friday’s reversal along with the USD’s comeback suggest that the market is expecting some kind of PM-bearish development.
In yesterday’s alert, we wrote the following:
The breakdown was small, but visible. What are its implications? There are none, because the breakdown was already invalidated in today’s pre-market trading. At the moment of writing these words, the USD Index is trading at about 93.5, while the lower border of the flag pattern is at about 93.48. An invalidation of a breakdown is a bullish sign.
We previously wrote that the traders had most likely not believed that the USD would move higher as the downtrend was quite evident, looking back, and since the flag pattern was also quite visible, everyone seems to have been betting on a breakdown from here. That’s how the precious metals market used to react – whenever the USD moved closer to the lower border of the flag, PMs soared intraday… Until Friday. On this day, the sellers beat the buyers even though the USD was once again flirting with the lower border of the flag.
How did gold and silver react when the USD finally declined below the flag? They moved higher, but not significantly so. Besides, they both more or less already gave up the entire rally in today’s pre-market trading. Why didn’t PMs rally higher yesterday despite the breakdown in the USD? Because the buyers were already overwhelmed on Friday and the buying power dried up to a considerable extent. The precious metals sector doesn’t seem to be willing to move higher before declining significantly.
The USD Index finally ended the session back in the flag pattern, invalidating the seemingly bearish breakdown. Now, the outlook is stronger than before the breakdown as its invalidation is a bullish sign on its own. Naturally, the implications for the precious metals market are bearish.
Summing up, Friday’s session in gold seems to be the most important session of 2017 as confirmed by the volume and since this volume accompanied a clear and significant reversal, the implications are very bearish for the short and medium term. The lack of real action immediately thereafter is not a bullish sign on its own – it could simply be the case that the market is waiting for the outcome of the important Jackson Hole Economic Symposium before starting the next big move. Nonetheless, the USD’s comeback and – in particular – gold’s profound reversal suggest that the next big move in PMs is going to be to the downside.
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 initial target price levels / profit-take orders:
- Gold: initial target price level: $1,063; stop-loss: $1,317; initial target price for the DGLD ETN: $81.88; stop-loss for the DGLD ETN $41.88
- Silver: initial target price: $13.12; stop-loss: $19.22; initial target price for the DSLV ETN: $46.18; stop-loss for the DSLV ETN $17.93
- Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $26.34; initial target price for the DUST ETF: $143.56; 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 initial target prices:
- GDXJ ETF: initial target price: $14.13; stop-loss: $45.31
- JDST ETF: initial target price: $417.04; 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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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager
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