Gold Priced in Japanese Yen

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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.

Not much happened in the precious metals market yesterday and the same goes for the USD Index. However, there is something that most investors missed about the gold market. The gold price seen from the USD perspective is the key one, but the analysis of the yellow metals’ price from the point of view of other important currencies can also provide important indications. It seems that this is currently the case with gold in terms of the Japanese yen.

Let’s take a closer look at the charts (chart courtesy of http://stockcharts.com).

GOLD:XJY - Gold priced in Japanese yen

In this case, the price of gold doesn’t show a downtrend, but a big consolidation and the likely reason is the massive money printing by the Japanese monetary authorities. Still, even in the case of sideways trading, the more short-term moves in both the yen and USD terms are aligned. Consequently, the sell signals coming from the above chart are also important for our regular USD-oriented gold analysis.

What appears quite extraordinary on the above chart is the current position of the RSI indicator. It just moved to about the 80 level and then moved back down (moving even below 70). Such strong performance of the RSI is not something that we see every month or even every year. In fact, in the past decade, there were only 3 similar cases, when the RSI behaved in a similar manner. They took place once in 2011 and twice 2012. The first case was the 2011 top and the other two cases were two out of three other key tops above $1,750.

We recently wrote that investors appear to be reacting to the breakout above $1,300, just like they were reacting to the breakout above $1,900. The above analogy in gold in terms of the Japanese yen seems to confirm it.

There’s also another new confirmation.

Long-term Gold price chart - Gold spot price

We recently commented on gold’s monthly volume levels:

The August volume, on which gold rallied in August was huge and it’s directly comparable to only one case from the past – the 2011 top. That’s the only case when gold’s monthly upswing was accompanied by volume that was similarly big. Since that was THE top, the implications here are naturally bearish.

The volume was also extreme in weekly terms. Today, we can add that last week’s volume was also huge – it didn’t break the previous week’s record, but it was almost as significant. There was only one similar case in the past when the gold futures’ volume was so huge for two consecutive weeks – the 2011 top. Naturally, a repeat of the follow-up action (which seems likely) has bearish implications going forward.

GDX - Market Vectors Gold Miners - Gold mining stocks

On a short-term note, yesterday’s small upswing was accompanied by relatively low volume, which suggests that it was just a pause and that the decline will be resumed shortly.

Summing up, the interest in gold seems to have spiked recently, along with the Google searches for the phrase “gold trading”, gold’s volume (both daily, weekly, and monthly) and with the price of gold itself. The latter reacted visibly to the USD’s daily strength and mining stocks reacted even more. It seems that the rally in gold is finally over and the USD’s close visibly above 93 and gold’s close below $1,310 and $1,300 will serve as a confirmation.

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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