Briefly: In our opinion, speculative long (full) positions in gold, silver and mining stocks are justified from the risk/reward perspective.
The USD Index declined on Thursday, but came back with vengeance on Friday. The precious metals sector declined, but not substantially. It seems that the way in which the USD Index moves next will determine the next move in the PMs. Will metals and miners rally?
Most likely yes. The justification is visible on the chart below (chart courtesy of http://stockcharts.com).
In short, the back and forth movement after a sharp rally is the way the USD Index used to top many times in the past. In fact, most tops in the recent past were formed this way. Consequently, Friday’s rally to the previous high (the fact that it moved a bit above Wednesday’s high is rather irrelevant) doesn’t change much. The USD Index is still likely to reverse relatively soon and it is still possible that another short-term upswing (to 98.50 or so – the March highs) will be seen before the bigger correction starts.
However, that is not the key factor to keep in mind right now. The most important thing is that lately metals and miners didn’t want to react to the USD’s strength, so even if the USD moves to 98.50 or so, it doesn’t have to (and is not likely to) trigger a big decline. In fact, the subsequent move lower is likely to generate a bigger rally than the (uncertain) rally could.
Consequently, it seems that the risk to reward ratio still continues to favor long positions.
Not much happened on Friday apart from the above – at least not much that we can comment on. The move lower in metals and miners was rather small and it by itself didn’t change anything. The decline seen in the GDX ETF was accompanied by volume that was a bit lower than what we had seen on Thursday, when miners moved higher, so the price-volume implications are bullish as well.
Summing up, it seems that even though precious metals remain in a medium-term downtrend, a short-term rally is very likely before the decline continues. Based on last week’s strength of the entire precious metals sector in light of the USD’s rally and miners’ strength relative to the underlying metals (overall miners ended the week more or less unchanged while gold and silver declined), it seems that the risk to reward ratio continues to favor speculative long positions.
As always, we will keep you – our subscribers – updated.
To summarize:
Trading capital (supplementary part of the portfolio; our opinion): Long positions (100% 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:
- Gold: initial target price: $1,295; stop-loss: $1,237, initial target price for the UGLD ETN: $12.47; stop-loss for the UGLD ETN $10.23
- Silver: initial target price: $18.45; stop-loss: $16.88, initial target price for the USLV ETN: $19.78; stop-loss for the USLV ETN $14.67
- Mining stocks (price levels for the GDX ETF): initial target price: $25.77; stop-loss: $21.77, initial target price for the NUGT ETF: $17.38; stop-loss for the NUGT ETF $9.77
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: $43.87; stop-loss: $35.86
- JNUG ETF: initial target price: $15.87; stop-loss: $8.78
Long-term capital (core part of the portfolio; our opinion): No positions
Insurance capital (core part of the portfolio; our opinion): Full position
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 always, we'll keep you - our subscribers - updated should our views on the market change. We will continue to send out Gold & Silver Trading Alerts on each trading day and we will send additional Alerts whenever appropriate.
The trading position presented above is the netted version of positions based on subjective signals (opinion) from your Editor, and the Tools and Indicators.
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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