In the previous update we sent you, we have addressed several milestones that we thought were needed to achieve before the precious metals sector will resume its primary direction, which is UP. The vast majority of these milestones has been or is right now being achieved, so we are sending you another update with our comments regarding issues raised in the previous message, and comment on very recent price action in gold and silver.
Below we present a quick reminder of the milestones we have previously indicated as important along with our current comment (quotes from the previous update are in italics):
- 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. (...) 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. (...) 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.
This is exactly what is taking place right now. US Dollar is now entering the trading range that we still think has a big chance of stopping the rally. It could even touch the 75 level, but the level of resistance itself is not the most important aspect of this analysis. The really crucial part is the fact that gold seems to have decreased its reaction to similar increases in the U.S. Dollar Index. Further information can be found in the essay entitled 'Predicting and Taking Advantage of Corrections in Gold' in the Research section on our Website. If precious metals cease to react to minimal upswings in the Dollar and the USDX rally is at last somewhere near maturity, does it really make a difference to wait for The Top in USDX? More importantly - does it pay to wait for the top? The final decision is up to you, but we think that it makes little sense. Ultimately we invest and speculate to make money in the long run, not necessarily to pick each and every top and bottom. The downside is minimal, as the prices of precious metals do not react to Dollar's appreciation with full strength, and on the other hand it is not unlikely to see these prices rise dramatically in a short period, as Dollar starts to fall modestly. It is probable that even mere pause in the USDX rally would cause gold and silver and respective stocks to appreciate.
- (...) This makes us skeptical about the DJIA breaking the 12500 level. (...) On the other hand, today's (April 1-st) 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 (...), gold stocks as well as other strong sectors and companies will fall relatively hard but not for long. (...) $360-$370 level on the HUI index would not be out of the question. (...) Should one of these factors (PM's or stock market) change their direction, gold stocks are likely to move rapidly. (...) we conclude that for at least few days it will be the stock market which changes its direction and falls at least very temporarily. (...)
Our comments on the general stock market have not changed dramatically. We still think that the stock market will experience a correction before rising again. Sure, the US Economy is in trouble, but then again, Fed will most likely keep pumping liquidity into the system to the point when it does not even SEEM working. This means inflating all asset classes, including the general stock market. Besides, it's the election year, and there are very good reasons as to why the general stock market usually shines is such years. We did not see the market perform really well so far, but we think it's still ahead of us. This opinion is not very important when it comes to our final views on the precious metals sector timing. The USDX / Gold / Silver fundamental and technical picture is so favorable for the long term that we think this sector is going to go up no matter where the general stock market goes. However, you registered on our Website to read our opinion on current events, so we are telling you what we think. The way we see it, the technical indicators suggest that one more test of the 12500 level is needed. We are not very certain of this (let's say we give it about about 60% chance of materializing), but it's still the most likely outcome in our view.
- 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.
These comments still apply. We could get lower in the HUI, perhaps to the 360 level if the general market corrects. If it does not, then perhaps we have just seen the bottom in the gold and silver stocks.
- (...) 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. (...)
It happened on May 2-nd - gold rose along with rising U.S. Dollar Index. PM stocks (HUI) did not follow gold lower in the Apr 29-th - May 2-nd time frame. This all indicates that we are close to the bottom. That's why we believe it is prudent to make at least long-term purchases right now.
The bottom line is that the general stock market influences precious metals mainly in the short term, whereas the precious metals themselves are far more important in the long term. Situation on the metals has improved (meaning relatively low prices) considerably and it makes a lot of sense to purchase gold / silver or gold / silver stocks for the long term. Right now we are beginning to get back to the precious metals market on the long side. We have just begun to accumulate junior stocks, since at this moment this is our preferable form of long term investment in the precious metals sector. We have also just bought put options on SSO, strike price 75 (proxy for the general stock market) that expire in May and in June, however we used only a couple of percent of our total portfolio. Please note that we are rather risk-tolerant, so any form of shorting the market right now may not be appropriate for you if you are risk averse. We are still keeping the rest (20%) of our speculative (not-long-term) capital in cash, ready to take advantage of any spike low that could materialize, as it was often the case in the past.
Here is the list of junior stocks that we like specifically. The first one is EDV.TO, which serves as a proxy for the whole junior sector, so we think that one can put a couple times more money in this stock than in other individudal stocks from the list, as EDV.TO is 'diversified' itself, by the nature of its business. The rest of the stocks, in our view, can be purchased with equal weights, or with diminishing weights (like we have), since the stocks are written in the order of much we 'like' the particular stock.
edv.to, caa.v, egd.v, svl.v, sqi.v, msv.to, spm.to, ok.v, sst.v, mag.to, fr.to, gpr.to, bcm.v, fur.v, nmb.v
Please note that probably the most important aspect of participating in the junior sector is the diversification. You should be fine with other junior companies (for example if you have subscribed to a newsletter with fundamental approach and you believe that stocks selected in that particular newsletter are superior to other juniors) as long as your portfolio is diversified. Sure, you can make a killing if you have one junior that is very successful but in the long term the odds are against you. This is not how big money are made AND preserved in the long term. Please see our essay "The Universal Investor" for details on this approach.
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