Briefly: in our opinion, full (250% of the regular size of the position) speculative short position in silver is justified from the risk/reward perspective at the moment of publishing this Alert.
Quite a lot happened yesterday. And not much – at the same time. It all depends on the way one wants to view the developments. In intraday terms, we saw new highs in the precious metals sector and a new low in the USD Index. In terms of the closing prices, however, we saw very little new going on – the above-mentioned markets closed more or less where they had finished the previous day. What really happened, and what has really changed?
The regular Stockcharts’ charts don’t seem to cover the entire picture, so we will once again focus on the ETFs.
We have only two charts for you today, but these charts include all the markets that we wanted to cover anyway: gold, silver, mining stocks, and the USD Index, as well as a proxy for the latter - the UUP ETF.
The GLD, SLV, and GDX ETFs have all moved higher initially only to give away all (gold), or almost all (silver and miners) of what they had gained during the day. At the same time, the USD Index reversed and ended the session higher. The above kind of reaction shows that the PMs are currently very vulnerable to such moves and – in particular – breakouts and breakdowns in the USD Index.
Silver stopped and reversed after reaching its previous high – there was no breakout in this market, even though gold and miners moved above their previous highs. That’s normal given the uptrend in the gold to silver ratio. The implications of the reversal combined with the resistance being reached are bearish.
Gold reversed on an intraday basis, which might be seen as a sign of reversal. On a stand-alone basis, yesterday’s session was bearish. However, putting the decline in context of the previous days and months, we see that nothing material really changed based on this decline. No breakout was invalidated. Consequently, it didn’t really add much clarity to gold’s outlook for the next few days.
Mining stocks reversed as well, which is bearish at first sight, but we also have to note that miners showed significant strength yesterday, by closing above the previous days’ closing price. Yesterday, we wrote that the miners will shortly decide the way in which they would reflect their 2016 performance. Yesterday’s session didn’t add much clarity, because on one hand, the reversal confirms the analogy to the fake moves in the final parts of a given move, and on the other hand, the daily outperformance confirms the bullish case. The daily outperformance of miners, however, combined with gold’s technical ability to climb to the 2018 highs before the next strong resistance is reached is too bullish combination for us to continue to hold the short position in the gold part of the precious metals market right now. We will likely resume the short positions in miners and in gold, but at a more favorable risk to reward ratio.
The USD Index reversed as well after reaching its mid-January high. It might be the case that the decline to this level was the end of the decline that was technically likely after the USDX failed to move above the declining red resistance line. This scenario is definitely supported by the situation in the euro that we discussed yesterday.
If the USD Index reversed for good and now it makes another attempt to rally above the declining red resistance line and its 2018 highs – and if this rally is successful – then gold is likely to plunge.
At this time, it seems that the precious metals investors simply assumed that the USD Index is going to fail in its rally attempt and that another move lower is actually taking place. Once they have more clarity that this isn’t the case and that the trend in the USDX is still up, the ensuing reaction could be volatile. Gold is likely to give back all that it gained recently, and we will most likely not have to wait too long for that.
Summary
Summing up, gold showed a lot of strength on Tuesday and miners contributed with their own strength yesterday, and while these are probably both fake moves, their direct implications are too big to be ignored. The medium-term outlook remains bearish, but the odds for the rally’s continuation in the very near term increased too much for us to continue holding the full short position in gold, silver and mining stocks. Instead, we only keep the silver position intact (as it’s short-term acting as the weakest part of the PMs pack), while we keep out of the other two markets.
Overall, we limited our exposure here, as the short-term situation became less bearish than it had been previously (we emphasize talking about the short-term now only), but we did so in a non-symmetrical way as the technical picture for different parts of the precious metals market is quite different. The entire sector is still likely to move in the same direction in the end, but the strength of the individual moves might vary, so the above seems to be the optimal way to approach the current PMs countertrend upswing implications. To be clear about the trends – we continue to think that the precious metals sector will move much higher in the coming years, but before the powerful rally starts, we’ll see one additional big wave down, below the 2015 lows. The current upswing is a counter-trend move with regard to the above-mentioned wave down.
Please note that since the medium-term trend remains unaffected by the recent developments and the downside target remains intact (about $890 for gold), the precious metals market is likely to erase everything that it had gained in the last several days, weeks, and months, before THE bottom is in.
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 silver are justified from the risk/reward perspective with the following stop-loss orders and exit profit-take price levels:
- Gold: no position
- Silver: profit-take exit price: $12.32; stop-loss: $16.44; initial target price for the DSLV ETN: $47.67; stop-loss for the DSLV ETN $23.68
- Mining stocks (price levels for the GDX ETF): no position
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 1st Alert.
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
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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.
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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager
