Briefly: In our opinion no speculative positions in gold, silver and mining stocks are now justified from the risk/reward perspective. However, day-traders might consider a small speculative long position in silver, gold and mining stocks.
The USD Index soared once again yesterday and gold, silver, and mining stocks declined once again. Is this the top / bottom or does the acceleration in the rally mean much more upside / downside at this point? Let’s check the charts for answers (charts courtesy of http://stockcharts.com.)
The USD Index is still likely to turn south based on the resistance line that was reached, the turning point that is still very close and the extremely overbought situation in the short term.
The USD Index moved lower once again today, in pre-market trading and precious metals’ reaction was very small.
No wonder – the strong support was just reached. Yesterday, we wrote the following:
The long-term gold chart features a visible medium-term downtrend, but at the same time it also shows that the long-term support is relatively close. This means that we could see some kind of a pause even if gold is to move a bit lower in the short term. The support is currently [close to] $1,250.
The support was reached and thus gold is now quite likely to correct its recent decline. The situation on the USD Index seems likely to trigger the upswing, but the move higher seems likely also based on metals’ lack of reaction to today’s move higher in the USD.
Please note that gold moved to its previous lows when one compares it to the prices of corporate bonds. That’s another strong support. Even though we expect this support to be broken in the coming weeks, it seems that it could generate a bounce at this time given what we wrote earlier in today’s alert about gold and USD.
The silver market is also at a very important support level – which seems to be the reason for which it refuses to move lower.
Please note that the $19 level held as support many times in the past year. There were unsuccessful attempts to move below it on Dec 3, 2013, Dec 4, 2013, Dec 31, 2013, Jan 30, 2014, Apr 24, 2013, May 1, 2014, May 2, 2014, May 29, 2014 and the only time that we silver closing below $19 was from May 30, 2014 to Jun 4, 2014 – after that a sharp rally started. In other words the $19 level remained unbroken for a long time and the only breakdown was quickly invalidated.
Once it breaks below the previous lows, the decline is likely to accelerate very sharply. Until then, this support is likely to generate bounces and it seems that this will be the case also this time.
As a reminder – the USD Index is not the only market that follows a cyclical pattern – we can see the same type of behavior in silver. Will the white metal decline once again here without a temporary rebound? That seems unlikely – the situation is extremely oversold (note the very low RSI level), the cyclical turning point is here, and silver just reversed on a greater-than-average volume (not huge one, though).
Meanwhile, the breakdown in mining stocks was just confirmed. The miners are likely to slide further in the coming weeks but – again – it seems that they won’t do so without another – generated by a decline in the USD - move up.
Please note that miners moved to the support created by the 61.8% Fibonacci retracement level and the RSI indicator is now very close to the 30 level – something that accompanied local bottoms in the past.
Summing up, the situation in the precious metals market is very tense. The medium-term trend remains down and we saw breakdowns in gold, silver and mining stocks, but at the same time the situation in the USD Index (which has been a major factor in determining the PMs’ and miners’ price swings) suggests that we could see a corrective upswing.
The most important thing is that the situation doesn’t really impact the medium-term outlook (after all, long-term investments are usually the biggest part of one’s portfolio), which remains bearish. In other words, we are already taking advantage of declining prices by staying on the sidelines – with the aim to buy back heavily at lower prices.
From the speculative point of view it still doesn’t seem to be a good idea to open speculative positions yet. Actually, we thought about opening long positions here and even wrote about it. However, when we were calculating the target prices and stop-loss details it turned out that the potential move up is too small to justify the risk of betting against the medium-term trend. The prices at which we had in mind for closing potential longs were $1,276, $19.50, and $25.30 for gold, silver and GDX ETF, respectively. After that, the long position would be too risky too hold given the existence of the medium-term trend. Since that is a relatively small rally to bet on, we decided not to open a position here and wait for the correction to make the picture clearer for opening the short positions.
To summarize:
Trading capital (our opinion): No positions
Long-term capital (our opinion): No positions
Insurance capital (our opinion): Full position
Please note that a full position doesn’t mean using all of the capital for a given trade. You will find details on our thoughts on gold portfolio structuring in the Key Insights section on our website.
Our preferred ways to invest in and to trade gold along with the reasoning can be found in the how to buy gold section. Additionally, our preferred ETFs and ETNs can be found in our Gold & Silver ETF Ranking.
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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