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.
Friday’s session was rich in price events as both: gold and silver moved significantly up and down, while the USD Index plunged. These price moves were most likely triggered by the comments from the monetary authorities at the Jackson Hole Symposium, in particular by comments from Janet Yellen and Mario Draghi. They both didn’t announce any significant actions and in general they speeches revolved around defending the regulations of the financial system. Still, the markets – in particular the currency market – managed to react in a profound way. What are the implications for the precious metals market?
In short, as far as last Friday’s session is concerned, they are rather bearish and the previous strongly bearish points remain up-to-date.
Let’s take a look at the gold price for details (chart courtesy of http://stockcharts.com).
The volume during Friday’s session was big, and while the intra-day price action itself was volatile, gold ended only $5 higher, which is rather insignificant. The high-volume sessions usually mark important events and the candlestick that accompanied is viewed as important. This time, it could the case that Friday’s session marked the final top, however, it is not clear. If we take both previous months into account, Friday’s session was preceded by a rally, but if we take the past 2 weeks into account, Friday’s session was preceded by a consolidation. The high-volume session after a rally would be bearish, but the same session after a consolidation is rather inconsequential.
Consequently, the implications of Friday’s high-volume session are only somewhat bearish, while the implications of the previous Friday’s session remain clearly bearish (back then it was rather clear that the preceding move was to the upside).
The same is largely the case with silver – the white metal also moved back and forth on huge volume, but the context of this move is unclear and that makes the implications only somewhat bearish.
In case of the mining stocks, the upswing took place on volume that was surprisingly low. It’s kind of ironic that the only part of the precious metals sector that moved more visibly higher (given that both Thursday’s and Friday’s session ended in green), had done so on low, and declining volume. The implications are bearish – the move higher doesn’t appear to be the real direction of the market – it seems that miners moved higher because they “had to” – either because of general stock market’s daily rally or a plunge in the USD Index. The strength of the reaction should be more significant if this was the real move.
Again, the strength of the reaction in gold, silver and mining stocks has to be compared to something – in this case, the thing we compare it to is the USD Index. That’s one of the key drivers behind PMs’ short- and medium-term price swings.
The USD Index took a significant dive below the flag pattern and also an insignificant dive below the previous August low. That’s an unconfirmed breakdown in case of the latter (and a breakdown below the previous lows is much more important than the breakdown from the flag pattern), but it’s still an important bearish development. That’s something that theoretically should make gold soar and gold wasn’t able to even close above $1,300 on Friday.
Consequently, the relative performance of gold and silver was very weak. While the miners moved a bit higher on Friday, the volume that accompanied this move was low, which still has bearish implications.
At this point one may ask if the breakdown in the USD is not something that should lead to another powerful slide, like the one that we’ve seen in June and July. At this time, this doesn’t seem likely. One reason is that the breakdown was not confirmed and the second reason is that the EUR/USD currency pair (which is the biggest component of the USD Index) is known for its fake breakouts and breakdowns before turning in the opposite direction. Finally, the long-term support in the USD Index wasn’t broken – it was re-tested, so its proximity continues to have bullish implications for the USD.
Summing up, it seems that “a lot happened but little changed” is the phrase that summarizes Friday’s session very well. There were many comments from the monetary authorities, but they were not particularly significant. There was a lot of intraday action in gold and silver but ultimately it doesn’t seem to have changed anything as their reaction to USD’s decline was very weak. The outlook remains bearish.
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.
=====
Latest Free Trading Alerts:
Two weeks ago, the London Bullion Market Association published a new edition of its quarterly journal called “Alchemist.” What can we learn from this publication?
S&P 500 index gained 0.2% on Friday, as it continued to fluctuate within a relatively narrow few-day-long trading range. Will uptrend continue? Or is this a topping consolidation? Is holding medium-term short position still justified?
Stocks Extend Their Fluctuations - Which Direction Is Next?
=====
Hand-picked precious-metals-related links:
PRECIOUS-Gold climbs to 1-week high after Yellen, Draghi comments
Gold Is Shaken by a Mysterious 2 Million-Ounce Trade
=====
In other news:
Europe Stocks Drop on Euro Strength; Dollar Steady: Markets Wrap
Wall Street Vets From Dalio to Gundlach Warn on Emerging Markets
Oil markets roiled as Harvey hits U.S. petroleum industry
=====
Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager
Gold & Silver Trading Alerts
Forex Trading Alerts
Oil Investment Updates
Oil Trading Alerts
