The fall in the price of precious metals has been fast and deep with only a small pullback along the way. Right now the price of gold and key gold-related equities is getting closer to critical support zone, which in our opinion has high probability of stopping recent decline in the PM prices. Before it does there are still a few milestones that we think need to take place before prices get back on their main course - which, in our view, for the next several years is UP.
Important factors that need to be taken into account here are:
- USDX counter-trend rally - with everyone and their brother bearish on the buck it's not unlikely that the US Dollar Index rises to the 73.4 level at least, with 74.3 being more likely to be seen as a resistance. Noticed what did the USD do on March 18, when the federal funds rate was slashed by 75 base points? It felt very modestly and then rallied. That's very contrary to what one would expect - usually falling interest rates mean that particular currency will lose value, as more of it can be created. This indicates with high probability that those who were bearish on the market already sold their dollars and now all there is left to do in the short term is to buy. Please note that the 73.4 - 74.3 level would perfectly fit the ABC correction pattern and also Fibonacci retracement levels from the December 2007 top. Also currently the 50-DMA (50-day moving average) is around the 74.4 level, further increasing the probability that this level might prove to be a strong resistance. In sum - we expect the USDX to rally, but not very far. Should gold stop declining as the dollar rises, you should consider buying the precious metals.
- Stocks that seemed strong in the last several weeks (speaking of the general stock market) started to lag the market instead of leading it (e.g. IBM). This makes us skeptical about the DJIA breaking the 12500 level. During the last phase of the fall it is quite common that the strongest sectors, as well as individual strong stocks hold well until the very last days of the decline. When they do fall, the fall is fast, deep and short-lived. Take a look on MOS in the middle of January 2008 to see what we mean. On the other hand, today's brakeout took place on a high volume on the DIA, which usually indicated that the rise will continue for some time. In this situation we think that the most probable scenario is that the general stock market rises, but at the very first pullback (which may materialize even tomorrow), gold stocks as well as other strong sectors and companies will fall relatively hard but not for long. We will view this as a buying opportunity. Should this breakout prove to be really a fakeout - we expect substantial drop in the prices of gold and silver stocks. $360-$370 level on the HUI index would not be out of the question.
- Today PM stocks got strong support from the general market (as DJIA rose about 3%), which, to a great extent, softened their fall caused by the drop in the metals. Remember the "spring theory" from our essay about juniors? What we see here is very similar mechanism. Price of the underlying metals fall, but the general stock market rally - there is pressure on both sides. Should one of these factors (PM's or stock market) change their direction, gold stocks are likely to move rapidly. >From the aforementioned points, we conclude that for at least few days in will be the stock market which changes its direction and falls at least very temporarily. Please note that this mechanism and correlation between gold, general stock market and the PM stocks works best in the short term. We would not recommend relying on the stock market to make long-term investment decisions in the precious metals market.
- Although today's session looked like "V" pattern or "hammer" candlestick, we doubt it will prove to be a sign of reversal, as it was NOT confirmed with very high volume. This means that not necessarily the transfer of large amounts of stocks from weak to strong hands is completed.
- We see a head-and-shoulders pattern in the GDX, beginning on Feb 3rd 2008.,
- Applying Fibonacci retracement levels and the fractal theory to the long (3 years in this case) chart gives us $84 as the initial target for gold, measured by GLD and $82 level that we think will ultimately stop this decline, should it not end earlier. Of course price can go lower than that, but we don't think it would go much lower or stay there for over a week or so. We plan to intensify our purchases as GLD approaches $84 and we will complete them as GLD goes to $82 especially accompanied by a high volume.
- Using similar analysis to the one mentioned above we estimated the initial target at $380 for the HUI index and $360 at the final target. Should the rally in the general stock market continue, we think the $380 level would be very close to the low. If you think about long term investing, anything below the $400 level on the HUI index is safe to buy.
- We are now rebalancing our portfolio, meaning that we plan to add mainly to our positions in the junior sector, as this decline continues. You can check the latest essay on our Website (Juniors - Performance and Timing) for details.
Either way - If you decide to purchase gold, silver or precious metals stocks, you should be fine in the long term. However if you wish to take a little more risk for more profit, you could wait for lower prices to complete your purchases. If USDX keeps rising and precious metals will cease to fall or the they will fall by really insignificant amounts, we might consider this correction overdone. If the gold / silver stocks stop falling despite falling prices of respective metal, we will consider that we are at or very close to the bottom. Should both of these conditions materialize, we would view it as a strong buy signal and that would be a moment when we will be finishing our purchases of high quality PM stocks with emphasis on juniors.
All of the above is just our view on the current market situation and may prove wrong, as nobody can be right each and every time. By registering at our Website, you confirmed that you are interested in our thoughts on the current market situation, so we're sending it to you. Please do your own due diligence before making any investment decisions.
This is the initial, basic from of our commentary. The Weekly Commentary (+updates) will include more thorough, complex and longer content with detailed, User-friendly explanations. The new, convenient form will include many charts and tables with specific comments.Back