Gold & Silver Trading Alert originally published on March 10th, 2014 9:16 AM
Briefly: In our opinion short speculative positions (half) in silver and mining stocks are justified from the risk/reward perspective.
We previously emphasized that the situation in Ukraine was the main bullish factor for higher precious metals prices (mainly for the price of gold) and that remains to be the case. However, even though the situation didn't improve, precious metals moved decisively lower on Friday. This does not bode well for the precious metals market, but let's examine the key charts before making the final call (charts courtesy of http://stockcharts.com):
Based on Thursday's closing prices, we wrote the following:
The volume was very low during yesterday's upswing, which has bearish implications. We wrote the same yesterday, but this time the implications are clearer as the rally was clearer as well. Bigger rally + very low volume have more bearish implications than a rather small rally on the same volume levels.
On Friday gold declined on relatively strong volume, which is another confirmation of the bearish outlook. The yellow metal now follows the rally-on-low-volume-but-decline-on-high-volume pattern, which is a bearish phenomenon. High volume usually tells the true direction of the market and in this case it's down.
The same was the case in the silver market and for mining stocks. Let's take a look at the latter.
As you can see on the above chart, the GDX ETF moved higher on low volume but declined (on Friday) on relatively high volume. Again, the implications are bearish, especially that the past few weeks have been similar to the July and August 2013 topping patterns.
Silver also moved lower - in fact, most decisively in the whole sector. It is now well below the 2008 high and it was the second weekly close below it. Silver is currently below the $21 level. For the bearish outlook to be confirmed (and for us to increase the size of the short position in silver), we would like to see a move below the rising long-term support lines - marked in black and grey on the above chart. They are close to where silver is now, so we may see further deterioration relatively soon.
Meanwhile, what we wrote about the USD Index regarding the medium-term perspective remains up-to-date:
The USD Index declined below the previous 2014 low (while gold, silver, and mining stocks didn't move above their 2014 highs), but this "breakdown" doesn't really have bearish implications. Similar "breakdowns" were followed by significant rallies back in October and December 2013. The breakdown is not confirmed in a technical sense, and it seems doubtful that it will be followed by more weakness or that it will really be sustainable.
From the short-term perspective, we see that the USD Index declined on Friday but quickly moved back up. It moved to the December 2013 lows, which proved to be support. The most important thing visible on the above chart is the presence and proximity of the cyclical turning point. The USD Index is now right after the turning point, and the preceding move was definitely down, so a turnaround here seems very likely.
All in all, what we wrote previously about the outlook for the precious metals sector remains up-to-date. It doesn't seem that keeping a full long position in the investment category is justified at this point in our view. Based on last week's events and what had happened over the weekend it was likely that gold would move much higher - but its reaction has been very weak. It looks like there will be no rally in gold before a bigger decline. We are keeping half of the funds in gold, though, just in case the next days bring improvement (or perhaps the tensions in Ukraine would increase). If not - things will become even more bearish and we will likely adjust the position once again.
We might suggest changing the short-term speculative position and / or the long-term investment one shortly, based on how the markets react and what happens in Ukraine.
In other news, we have recently posted an important report on the role of rebalancing in the case of the mining stocks sector. You can often read that one should do "some rebalancing" but we went much further than that. We dedicated months of research to comparing the classic buy and hold approach with rebalancing and you will find results in our latest report. It's available free of charge.
To summarize:
Trading capital (our opinion): Short position (half): silver and mining stocks.
Stop-loss details:
- Silver: $22.60
- GDX ETF: $28.9
Long-term capital (our opinion): Half position in gold, no positions in silver, platinum and mining stocks.
Insurance capital (our opinion): Full position
You will find details on our thoughts on gold portfolio structuring in the Key Insights section on our website.
Again, our latest report on mining stocks rebalancing is available free of charge and we encourage you to read it.
Thank you.
