Silver and Miners’ Outperformance Explained

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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.

In yesterday’s alert, we wrote about the mining stocks’ huge decline that we saw on Monday and during the session the decline was somewhat invalidated. Moreover, silver outperformed gold as it refused to decline, even though gold moved lower – is the uptrend back? As it is usually the case, the context provides us with the key details.

In this case, the context is the performance of the general stock market, which moved visibly higher yesterday. Let’s take a closer look (chart courtesy of http://stockcharts.com).

SPX - S&P500 Large Cap Index

The upswing was sizable and the same goes for the accompanying volume. Consequently, it’s no wonder that the markets that are usually influenced by stocks in the very short term were indeed affected. This goes for i.a. crude oil, silver and mining stocks.

GDX - Market Vectors Gold Miners - Gold mining stocks

However, the upswing was smaller than Monday’s decline and the volume on which it materialized was also smaller. Yesterday’s upswing was also not enough to invalidate the sell signal from the Stochastic indicator. So, what did yesterday’s rally change? Nothing.

HUI Index chart - Gold Bugs, Mining stocks

In the case of the HUI Index chart, the sell signal from the Stochastic indicator is even more profound – yesterday’s small upswing didn’t change anything.

Gold didn’t move much yesterday, so let’s move right into silver. This time, we’ll use the SLV ETF for our analysis.

Short-term Silver price chart - SLV ETF - iShares Silver Trust

There are 2 things that appear particularly important on the above chart. The first thing is the shape of yesterday’s price performance. Silver formed a daily reversal candlestick – despite the early rally in the U.S. session, it moved back to the previous closing price (closing just 1 cent higher). Just as the name suggests, reversals after a rally have bearish implications.

The second thing is that it’s about time for silver to decline. The vertical lines on the above chart represent silver’s cyclical turning points, and one such point is just around the corner (at the end of the month). However, please note that in all three previous cases, major tops formed a bit before the turning points – this is where we are right now, so it could be the case that silver’s top is already in. If it’s not, then we are still likely to see a final reversal and another big decline shortly.

Summing up, there are many signs pointing to the upcoming decline in the precious metals sector and the most recent ones come from the silver market and mining stocks.. In light of the upcoming turning point in silver and the extreme situation in the currency markets, it seems that we won’t have to wait long for the decline to be resumed. The medium-term outlook remains bearish and any strength here – if we see it at all – is likely to be only temporary.

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 $44.57
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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