Briefly: In our opinion no speculative positions are justified from the risk/reward perspective.
The precious metals sector moved higher on Friday and in pre-market trading today. What was the likely reason? Increased tensions in Ukraine. Some say that there’s already a civil war there. How did gold react? Moderately, if you take into account Friday’s action only. This description might seem surprising until you consider the fact that gold is still lower than it was when Russian troops moved into Crimea. If it hadn’t been for the situation in Ukraine, we think that gold would already be below the 2013 lows. Gold will likely still get there, but there might be some bullish surprises along the way if the situation worsens. If nothing changes for some time, gold will move along with its main trend, which is down. However, we saw a move higher (Friday’s action + today’s pre market upswing) that was sizable enough to trigger another small upswing. That’s why we don’t think that keeping even small short positions is justified from the risk/reward perspective. We will likely re-open short positions shortly, though.
Let’s take a look at what happened (charts courtesy of http://stockcharts.com).
As mentioned above, gold rallied. It rallied on high volume, which makes the session seem significant. However, there was only one daily close above the declining resistance line, so it’s not confirmed yet. The high volume makes Friday’s price-volume action bullish, but the fact that gold reacted rather mildly to a significant worsening of the situation in Ukraine makes it much less bearish.
Some might say that the fundamental situation (Ukraine) will make gold move higher regardless of the situation, but our take is that the technicals will simply adapt. We will see a breakout and then an invalidation thereof (however, based on today’s pre-market rally it seems that we may have to wait a few additional days for it). In our opinion gold is not ready to rally significantly just yet, and the news-driven rally will be just temporary. When things calm down, gold will move to its default state, which at this time means more declines.
When compared to other commodities (gold:CCI ratio), gold hasn’t broken above the declining resistance line, so the trend remains down and basically nothing changed on Friday.
When viewed from the Australian perspective, gold moved up once again, which is still in tune with what happened in 2013. Last year, we saw an invalidation of the breakdown, then a move to the “neck” level of the head-and-shoulders formation, one more move back up, and only after that did the price of gold really decline. This pattern seems to be in place once again and it seems that we can expect more weakness in the coming weeks based on it.
Silver rallied strongly on Friday, which didn’t change anything, as silver is known to rally temporarily just ahead of serious declines. What we saw was simply a move back up to the 20-day moving average, after which silver moved lower once again.
However, silver moved higher again early on Monday, which may mean more upside in the short term. “May,” nothing more.
Miners moved higher on high volume, but they still haven’t moved above their late-April highs. It simply looks as if gold was catching up to the mining stocks’ move higher in the final part of April. If this really had been a start of another major wave up, we would have likely seen a move in mining stocks that would have taken them well above the previous highs. We didn’t see it – miners reacted positively to gold’s strength, but they didn’t rally that significantly. The really was smaller than one would expect it to be in a real bull market. We don’t think that “gold leading the way” is really a bullish sign at this time.
With bullish and unclear actions in the precious metals market, one might ask what happened in the currency markets.
The Euro Index simply moved to its declining resistance line. It was not broken, so the next move is likely to be down and it’s likely to lead precious metals lower.
The USD didn’t do much on Friday if one focuses on daily closing prices, but in reality the USD rallied in the first part of the session and then declined in its second part. It was the intra-day decline that triggered a rally in gold, silver, and mining stocks.
The key thing to keep in mind here is that despite the dollar’s intra-day strength, we are after a short-term decline and right at the cyclical turning point, which means that the USD Index is likely to go up. This also means that the precious metals sector is likely to move lower shortly.
Overall, the situation in the precious metals market remains bearish despite increased tensions in Ukraine – or even, in a way, because of them (because gold’s reaction was once again not that strong). The situation before today’s upswing was not as bearish as it had been before the previous decline, and after today’s pre-market move it’s rather unclear for the very short term (for the next several days). We will quite likely re-enter short positions shortly. The size of the position will depend on the strength of the bearish signals that we’ll get.
To summarize:
Trading capital (our opinion): No positions.
Long-term capital: No positions.
Insurance capital: Full position.
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.
Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief
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