gold investment, silver investment

Precious Metals: The Long-Term Perspective

November 22, 2013, 10:34 AM

Based on the November 22nd, 2013 Premium Update.

In our latest free essay, we focused on silver. We wrote: "the outlook for silver remains bearish and further declines should not surprise us." On the same day, after the essay was posted, silver declined sharply moving very close to the declining support line that we had featured in that essay. On a side note, it was actually a long-term support line that stopped the decline (for now).

With so much volatility this week, we have decided to zoom out a bit and take a look at the markets from the long-term perspective. Is the final bottom in for gold, silver and mining stocks? We have prepared 3 charts for you today that should help us deal with this issue. Let’s start with the Dow-to-gold ratio (charts courtesy of http://stockcharts.com).

Dow to gold ratio chart - INDU:GOLD

That’s one of the most important and useful ratios there are as far as long- and medium-term trends are concerned. In particular, the big price moves can be detected before they happen (note the breakout in the first months of the year that heralded declines in gold).

In Tuesday’s Market Alert, we wrote the following:

The Dow-to-gold ratio moved above the 12.5 level - to 12.56. The breakout is small and unconfirmed by the moment, but we are one step closer to the next (and probably final) plunge in the precious metals sector.

With the ratio even higher today, we have a good possibility that the breakout will be confirmed and that we will see a big drop in the price of gold in the coming weeks or months.

Having discussed the above, let’s move on to the chart featuring junior mining stocks. This is actually the only somewhat bullish chart that we feature today. This might seem encouraging, until you consider the fact that the previous small breakouts turned out to be fake moves and led to even bigger declines.

Toronto Stock Exchange Venture Index - proxy for the junior miners - CDNX

In our essay on mining stocks from Nov. 8, we wrote the following:

Although the juniors sector moved above the declining resistance line, we think that it’s still too early to say that the breakout has been truly confirmed – especially when we take into account the position of the RSI.

Please note that the last two times when the indicator reached these levels, major medium-term tops were formed. Therefore, we would need to see a verification of the breakout first to view it as an important medium-term signal. This would be the case in any other breakout as well, but in case of the above chart, waiting for a verification seems particularly justified because we have already seen a false breakout at the beginning of this year – one which was followed by a significant decline in the entire precious metals sector.

Since we wrote the above, juniors have declined (in the preceding two weeks and also this week) and they look like they are about to invalidate the previous breakout, which would – naturally – have bearish medium-term consequences for the entire precious metals sector.

If the decline that we are likely to see in the precious metals sector takes juniors back below their declining red support/resistance line, we will have one more indication that the next major move will be to the downside.

Please note that in case of the junior mining stocks the next significant support is much below the current value of the TSX Venture Index, so the coming decline will likely be very significant.

Finally, we would like to discuss the current situation with the gold-stocks-to-gold ratio.

Gold stocks to Gold ratio chart - HUI:GOLD

On the above chart, we see that the situation has deteriorated in recent days. Since the beginning of the week, the HUI-to-gold ratio has declined and hit a fresh monthly low on Thursday. Despite this drop, the gold-stocks-to-gold ratio is still above its previous 2013 lows.

From this perspective, the downtrend remains in place, and it will remain in place as long as the HUI-to-gold ratio stays below the declining resistance line. Since the ratio is not that close to it, it doesn’t seem that we will see a breakout soon. In fact, we don’t expect to see one before another major plunge in the precious metals sector.

Summing up, the final bottom for the decline in gold, silver and mining stocks doesn't seem to be in just yet. Consequently, in our opinion jumping in with both feet into the gold market might not be the best idea right now. Still, when and how that bottom is reached is a different matter and we encourage you to keep an eye out for technical signs that could help you not only enter the market at the right moment, but perhaps make money also while metals and miners decline.

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Thank you for reading. Have a great weekend and profitable week!

Przemyslaw Radomski, CFA

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Aug Market Overview

Gold Market Overview

For a long time, pundits talked excitedly about the rapid, V-shaped recovery. I never shared this view, finding it too optimistic and without basis in reality. Like Jeff Goldblum in Jurassic Park, I hate being right all the time, but it really seems that I was right about this issue. According to the July World Flash report by IHS Markit, we can read that "the new wave of infections has reduced the probability of a V-shaped cycle (...) and increased the risk of a double-dip recession (W-shaped cycle)."

What does it all mean for the gold market? Well, the fragile, W-shaped recovery is, of course, a better scenario for gold than a quick, V-shaped recovery. It means slower economic growth and longer recession, which would force central banks and governments to expand and extend their dovish stance and to provide the economy with additional rounds of stimulus. Music to gold's ears!

Read more in the latest Market Overview report.

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