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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: Gold Stocks Break Below 2008 Low

Gold Trading Alert originally published on July 1st, 2015 8:23 AM:


 

Briefly: In our opinion, short (half) speculative positions in gold, silver and mining stocks are justified from the risk/reward point of view.

Gold and silver declined yesterday, but the really profound action was seen in the precious metals mining stocks. Both key indices for this sector (the HUI and XAU) declined below their respective 2008 lows and managed to close below them. What's next? Will gold and silver stocks bounce like they did in late 2014?

Before moving to the situation in the XAU and HUI, let's take a look at the metals, starting with gold (charts courtesy of http://stockcharts.com).

$GOLD Gold Spot Price (EOD) CME
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In yesterday's alert, we commented in the following way on gold's Monday's rally:

Gold moved higher yesterday and... That's about it when it comes to listing yesterday's bullish signs. The size of the move compared with its likely cause (closed banks in Greece and the introduction of capital controls), however, is actually bearish. Gold didn't react in a meaningful way to a very bullish factor, and this is a strong sign that the gold market lacks buying power and that it will move lower sooner rather than later.

We didn't have to wait for more weakness long - gold declined on Tuesday and it practically erased Monday's gains. The volume on which gold declined was slightly higher than the one on which it had rallied on, which also supports the bearish outlook.

Please note that there were only a few cases in the previous months when gold closed below $1,170. When that happened, it moved to $1,140 quite quickly. Consequently, we will not be surprised to see gold trading in tune with this pattern once again in the coming days.

$SILVER Silver Spot Price (EOD) CME
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The situation in the silver market didn't change - it's been bearish and it still is. Yesterday's decline is another step toward our target areas.

While we haven't seen anything new in the silver market, we saw a major development in mining stocks. Both the XAU and HUI indices moved below their respective 2008 lows and while the breakdowns were not confirmed, they already made the picture more bearish.

$HUI Gold Bugs Index - NYSE Arca INDX
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In yesterday's alert we wrote the following:

Gold stocksheld up relatively well last week by not moving below their 2008 low. Not only was it natural, but it also seems that the miners' "strength" was just temporary. Gold stocks declined despite rising gold once again yesterday and the implications are bearish. The support created by the 2008 low was not broken so the situation did not become extremely bearish for the short term, but still, it deteriorated.

Once this support is broken, the following decline could be sharp, so it seems justified to have at least a small speculative short position in this market at this time.

We have seen the mentioned breakdown (the HUI closing below 150), but before we say that they situation has become extremely bearish, we would prefer to see 2 additional daily closes below the 2008 low. In other words, we would like to see the breakdown confirmed.

$XAU Gold & Silver Index - Philadelphia INDX

We see exactly the same signal on the above chart. The XAU index closed below its 2008 low, but before this has very meaningful implications we will need to see the confirmation of the breakdown.

The fact that both indices are moving below their 2008 lows somewhat confirms this move, but in our opinion it's not enough to make the breakdowns really confirmed.

The most important thing about the mentioned breakdowns is that it all happened when the precious metals sector should have moved higher based on the crisis in Greece. The precious metals market is not only not rallying despite positive news - mining stocks (which should be outperforming gold if we were to see a rally) even managed to decline and break below a critical support. The implications are clearly bearish.

Before summarizing, we would like to reply to the question that we received from one of our subscribers as it seems that our reply could be useful for you as well:

Hello, I am a long time subscriber to your Alerts. I have a question to ask the editor about gold. The Yuan is almost certain to become a reserve currency as early as September. China is also waiting for Central approval to set up a gold fix and finally it has been speculated that the Chinese government will be announcing their gold reserve, in a way backing their currency with gold. How would these affect the price of gold and the US$? Would we have time to react? Thank you.

Thank you for your message. IF (!) China moves to the gold standard, the demand for the yuan will likely rise greatly, which would also mean increased demand for gold and thus its appreciation in non-yuan terms (also in terms of the USD).

IF - because we don't view this as likely. A significant appreciation of the yuan would severely hurt Chinese exports, which are very important for the Chinese economy. On a side note, if many gold investors view the above as likely and the price still disappoints (and miners continue to decline) then this is another sign that we will see much lower prices before seeing a major rally.

If that was to happen anyway... Would we have time to react?

In a way, we already reacting - we have part of our capital (the insurance part of the gold portfolio) in gold and silver, which makes sure that we won't miss a major rally in case of a sudden shock in the market.

As far as the rest of the capital is concerned, in short, yes, if by having time to react one means getting in the market well ahead of the vast majority of investors. We would probably have as much time to react as we had when gold broke below critical support levels in April 2013.

On April 12 we sent / posted the alert at 11:22 AM (gold was at about $1,500) in which we suggested closing the remaining half of the long-term investments in mining stocks (we exited the first half on April 4) and closing / hedging half of the long-term investments in gold and silver. We wrote about exiting the remaining half position in gold and silver in the April 15 (6:33 AM) alert. At that time gold was at about $1,410-$1,415.

Our aim was to exit the long-term positions completely after a meaningful breakdown below the 2012 lows. On Apr 12, we wanted to take action tens of dollars above $1,500, but the move was very volatile and even though we wanted to distribute the information earlier, we couldn't do it as the message had to be written, checked and sent (including quick proofreading and sending a test e-mail message to make sure that it went through). There are some limits to the form of providing signals in a newsletter that we aim to minimize, but we are not able to completely erase in this form of providing our services.

There might be a way for us to react much sooner and for you to "take action" almost instantly, but we can't publicly discuss the details (at least not yet).

Summing up, the situation in the precious metals market remains bearish and based on this week's disappointing performance of precious metals and very weak performance of mining stocks (and the breakdown below the critical support), it further deteriorated. It's not extremely bearish just yet as we haven't seen a confirmed breakdown in the HUI and XAU indices below their 2008 lows, so we don't think that doubling the size of our profitable short position is justified just yet. We're very close to this moment, though. It will take only 2 additional daily closes below the 2008 lows for the breakdowns to be confirmed and for the situation to become extremely bearish. On the other hand, we could see a reversal here or other signs of strength that could make us take profits off the table and enter long positions. It doesn't seem likely at this time, but we are not ruling out such a scenario.

To summarize:

Trading capital (our opinion): Short position (half) position in gold, silver and mining stocks is justified from the risk/reward perspective with the following stop-loss orders and initial (!) target prices:

Gold: initial target price: $1,115; stop-loss: $1,253, initial target price for the DGLD ETN: $87.00; stop loss for the DGLD ETN $63.78

Silver: initial target price: $15.10; stop-loss: $17.33, initial target price for the DSLV ETN: $67.81; stop loss for DSLV ETN $41.17

Mining stocks (price levels for the GDX ETN): initial target price: $16.63; stop-loss: $21.83, initial target price for the DUST ETN: $23.59; stop loss for the DUST ETN $10.37

In case one wants to bet on lower junior mining stocks' prices (we do not suggest doing so - we think senior mining stocks are more predictable in case of short-term trades - we if one wants to do it anyway, we provide the details), here are the stop-loss details and initial target prices:

GDXJ: initial target price: $21.17; stop-loss: $28.68
JDST: initial target price: $14.35; stop-loss: $5.65

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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