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.
Monday’s upswings in both gold and the USD Index and the breakout that it caused (only in the latter) had exactly the implications that we expected it to have – the USD moved higher, but gold didn’t. It was surprising at first sight, but not if one knew that the upswing in USD was meaningful, while the one in gold wasn’t. Let’s see exactly what changed and what didn’t and what this all implies for the following days and weeks.
Let’s start with the USD Index (chart courtesy of http://stockcharts.com).
In yesterday’s alert, we wrote the following:
The biggest change was seen in the USD Index. It seems to have just moved a little above its September highs (its trading at 92.67 at the moment of writing these words), which seems insignificant, but it also moved above the declining medium-term resistance line and it’s trading there also at this time. The breakout is not fully confirmed, but we have the first daily close above it, which improves the short-term outlook.
In the next few days gold could still move in the same direction as the USD Index, or seem not to react to its movement, but the inverse link between the USD and gold is likely to be back sooner rather than later. If the USD confirms its breakout, then we are likely to see a sizable rally relatively soon, so the bearish implications for the precious metals sector are likely to kick in in a few days, if they don’t kick in immediately.
We have just seen a second daily close above the declining resistance line and the USD continued to move higher also in today’s pre-market trading (93.37 at the moment of writing these words), which makes it very likely that later today we will get the third close above the resistance line. This means that its very likely that the breakout will be confirmed and the implications are already very bullish for the short and medium term.
From the long-term point of view, the action that we’re seeing this week is even more important. The USD Index moved above most of the key long-term extremes, thus partially invalidating the previous breakdown. So far only partially, because in the case of the long-term extremes, we would need to see at least one weekly close above these levels to say that they breakdown was truly invalidated. Still, based on what we see on the short-term chart, it’s very likely that we will see the USD Index close, more or less, to where it is right now, or even higher. This would, in turn, trigger very bullish implications from the long-term point of view, making the outlook very bullish for the following weeks and months.
In yesterday’s alert, we wrote the following on gold:
Gold moved higher, but it was not even close to reaching the previous rising support line, which is now at about $1,330. The line based on the daily closing prices is even higher – at about $1,350. Without a breakout or invalidation of a breakdown and with now new buy signal from the Stochastic indicator it doesn’t seem that anything changed at all. Indeed, at the first sight, the above chart seems to be featuring gold in a short-term downtrend and yesterday’s session is just a daily correction within this downtrend.
The downtrend seems to continue now as gold is trading at $1,292 at the moment of writing these words and the volume that we saw during yesterday’s downswing was bigger than the volume that we saw during Monday’s upswing.
Overall, gold’s “comeback” above $1,300 lasted for less than 24 hours.
In the case of silver, the trend also seems to remain down and what we wrote yesterday remains up-to-date:
The change in silver was also very small. It’s not visible from the long-term perspective and from the short-term point of view, we see that the white metal moved just a little higher.
Please note that silver moved back and forth around the $17 level for more than 2 weeks in August, so it wouldn’t be surprising to see some back and forth action also this time. Still, as you’ll see on the following USD Index chart, this kind of action in silver may not take that long.
In yesterday’s alert we wrote that miners hadn’t closed at or above the rising resistance line based on the previous closing prices, which meant that the previous breakdown had not been invalidated. Consequently, it seemed that yesterday’s upswing had been a correction – not a game-changer.
Mining stocks declined yesterday, erasing more than they had gained on Monday and the trend remains down. The Stochastic indicator flashed a buy signal, but we think that other factors are more important, especially that a similar signal turned out to be a fake one in the second half of June.
Summing up, the likely German-election-influenced simultaneous daily rally in gold and the USD changed little for the former and quite a lot for the latter. At first sight, gold moving up with the USD Index on Monday was bullish, but taking a closer look revealed that the implications were actually bearish.
The outlook remains bearish as indicated by the analogy to the 2008 pre-plunge price swings in gold and gold stocks, the 2008 analogy (RSI) in the case of the USD Index and multiple bearish signs that we have already seen: palladium’s rally and an invalidation of its breakout, extreme monthly volume in gold in August, invalidations of key breakouts in gold and silver and overall excitement that accompanied gold’s move above $1,300.
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: $1,366; initial target price for the DGLD ETN: $81.88; stop-loss for the DGLD ETN $38.74
- 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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