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Przemyslaw Radomski

Przemyslaw Radomski

Przemyslaw Radomski, CFA (PR) is a precious metals investor and analyst who takes advantage of the emotionality on the markets, and invites you to do…

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Gold and Silver Trading Alert: Miners Consolidate Before Next Big Move

Gold Trading Alert originally published on March 17th, 2015 8:12 AM


Briefly: In our opinion speculative short positions (full) in gold, silver and mining stocks are justified from the risk/reward perspective. We are keeping the stop-loss levels at their current levels, which means that we are effectively keeping some gains locked in and at the same time we're allowing the profits to increase.

Mining stocks have been trading sideway for several days now and the decline seems to have paused. We can infer something from this pause based on an event that accompanied it. Is the decline over or exactly the opposite - is it about to continue?

Before we reply to the above question, we would like to stress that basically nothing changed in the precious metals market yesterday, so all points that we made yesterday remain up-to-date. Consequently, today's alert will be rather short. Let's take a look at what happened in gold (charts courtesy of http://stockcharts.com).

$GOLD Gold - Spot Price (EOD) CME
Larger Image

Gold basically did nothing once again, but - this might seem surprising - the implications are actually bearish, not neutral. The reason is that gold remains in a rather tight and quickly declining trend channel. The pause that we saw in the past several days was enough to take gold from the lower border of the trend channel (which provided support) to (almost) its middle.

In other words, thanks to doing nothing recently, gold can now move lower without encountering support immediately. It's still possible that gold will continue to move sideways or even move a bit higher in the following days, but the potential size of the correction is now bigger as the upper border of the declining trend channel is also lower.

The next interim target for gold is at about $1,120 and the final one is at about the $1,000 level.

Once again, nothing changed in the case of silver (and the outlook remains bearish), so let's move on to the situation in mining stocks and to the reply to the previous question about the miners' pause.

GDX Market Vectors Gold Miners NYSE

The thing that is very important on the above picture is the volume. It has been declining during miners' recent consolidation, which suggests that the move is indeed a pause within a trend and not a bottom (in the case of the latter, we would expect to see higher volume during daily upswings). The previous move was down, so a move lower is likely to follow.

Please note that mining stocks verified the breakdown below the rising support / resistance line, which is yet another bearish sign.

Summing up, we are likely to see a small corrective upswing sooner or later, but it doesn't seem that we will see a more visible correction until we see gold close to its 2014 (intra-day) low. Gold stocks are now once again underperforming gold, which serves as a confirmation that the correction is over and the decline will now continue.

Even though the size of the profits on the current short position may suggest that's it's worth taking them off the table (we opened the short position on Jan. 23 when gold was at about $1,300), it seems that the risk/reward ratio still favors keeping the position open as it doesn't seem that the decline is over. Even though gold has already fallen significantly, it's still likely to decline even more in the coming weeks and it is this outlook that makes us think that the short position remains justified at this time.

To summarize:

Trading capital (our opinion): Short positions (full) in gold, silver and mining stocks with the following stop-loss orders and initial (!) target prices:

Gold: initial target level: $1,135; stop-loss: $1,234, initial target level for the DGLD ETN: $85.48; stop loss for the DGLD ETN $65.45

Silver: initial target level: $15.10; stop-loss: $17.23, initial target level for the DSLV ETN: $74.05; stop loss for DSLV ETN $48.36

Mining stocks (price levels for the GDX ETN): initial target level: $17.13; stop-loss: $21.17, initial target level for the DUST ETN: $23.49; stop loss for the DUST ETN $11.35

In case one wants to bet on lower junior mining stocks' prices, here are the stop-loss details and initial target prices:

GDXJ: initial target level: $22.13; stop-loss: $27.38
JDST: initial target level: $14.58; stop-loss: $7.10

Long-term capital (our opinion): No positions

Insurance capital (our opinion): Full position

You will find details on our thoughts on gold portfolio structuring in the Key Insights section on our website.

Thank you.


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