Gold & Silver Trading Alert originally sent to subscribers on March 24, 2014, 8:58 AM.
Briefly: In our opinion short speculative positions in silver (half) and mining stocks (full) are justified from the risk/reward perspective.
Friday was generally a calm day in the precious metals market and for the currency indices. The initial moves higher (in the early part of the session) were mostly invalidated later on and overall not much changed at the first sight. On second look, the lack of rally confirmed the breakdown in mining stocks. Let’s take a look (charts courtesy of.)
Interestingly, we can summarize the above chart in the same way that we did previously, because the daily move that we saw on Friday didn’t change anything overall:
Gold moved lower once again [on Thursday, but basically it didn’t do anything on Friday] but still not low enough to break below the rising support line. Gold is still outperforming silver and mining stocks (taking this month into account), but now the extent of the outperformance is much smaller. Still, with the situation in Ukraine still being tense, gold might hold up relatively well even if the rest of the precious metals sector declines.
At this time we see that gold’s reaction to the events in Ukraine has been very limited. When markets don’t react to factors that should make them move in a certain direction, they will likely move in the opposite direction relatively soon. In this case, it seems that gold will move lower.
The move below the rising support line (marked in red) could symbolize the start of another big downleg regardless of the geopolitical tensions. For now, the price of gold is already close to this support, but not yet below it.
Silver declined more than 5% last week. It moved below the rising support lines and closed there on Friday, which is a bearish indication. The situation in silver is oversold, but only on a short-term basis. Consequently, we could still see a corrective upswing here before the decline continues. Miners confirmed their breakdown, but there was no short-term breakdown in gold, so it’s not that clear whether the precious metals sector – including silver – will move lower immediately. It could be the case that miners while decline while metals will pause for a few more days.
The GDX ETF closed below the rising support line and the 50% Fibonacci retracement level for the third consecutive trading day and the breakdown is now complete. If we hadn’t mentioned the extra short position in miners previously, we would suggest it today. Please note that the small move up that we saw in the past 2 trading days materialized on low volume after a huge-volume decline. This suggests that the real move is down and that miners simply took a breather.
The HUI Index closed the week without a meaningful move back up, and the sell signal from the Stochastic indicator along with its implications remain in place. on it in the following way:
We saw a big downswing also in the HUI Index and it resulted in a major sell signal from the Stochastic indicator. In the past 3 years all cases (and many cases before 2011) when we saw this signal were followed by major downswings.
The USD Index finally rallied last week and it seems that this year’s decline is over. There are no sure bets in any market, but this week’s rally looks very similar to what we saw in October 2013. Back then the currency was also a little below the rising support lines only to come back with a vengeance. We saw this type of action last week and the outlook was bullish.
All in all, we can summarize the current situation in the precious metals market in the same way we have been summarizing it for the last couple of days:
It seems that the precious metals sector will move lower in the coming weeks, but just in case the situation in Ukraine deteriorates, we are keeping half of the long-term investment position in gold. In fact, gold has been outperforming both silver and mining stocks since Russian troops entered Crimea.
The technical picture for silver and – especially – for mining stocks is bearish, so in our opinion short positions here are justified from the risk/reward perspective. We might add to the short position in silver and open one in gold relatively soon – we will keep you informed.
It seems to us that if it weren’t for the events in Ukraine, the precious metals sector would be already declining and perhaps testing the 2013 lows or moving below them. This could still take place and it’s quite likely to happen once the situation in Ukraine stabilizes.
Trading capital (our opinion): Short positions: silver (half) and (full) mining stocks.
- Silver: $22.60
- GDX ETF: $28.9
Long-term capital: Half position in gold, no positions in silver, platinum and mining stocks.
Insurance capital: Full position.
You will find details on our thoughts onin the section on our website.
As always, we'll keep you - our subscribers - updated should our views on the market change. We will continue to send out Gold & Silver Trading Alerts on each trading day and we will send additional Alerts whenever appropriate.
The trading position presented above is the netted version of positions based on subjective signals (opinion) from your Editor, and the automated tools (SP Indicators and the upcoming self-similarity-based tool).
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.
Przemyslaw Radomski, CFA