Gold & Silver Trading Alert originally sent to subscribers on September 5, 2014, 10:20 AM.

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.

Even though gold didn’t react strongly to Mario Draghi’s comments, a lot happened in the precious metals market yesterday. We finally saw a breakdown in mining stocks and we saw an extreme daily rally in the USD Index. As you know, the USD Index very often triggers significant moves in gold. Even though the last 2 days didn’t bring any changes, the situation has just become very tense for the precious metals investors and traders. What are the implications for your precious metals investments and trades?

Let’s examine the charts and find out (charts courtesy of http://stockcharts.com.)

As you know, the USD Index is right at the cyclical turning point (or slightly behind it, which doesn’t change anything), so it’s likely to change its direction. Since it moved above the Sep. 2013 high in a very sharp manner, you might be wondering if there was something important that stopped the rally yesterday and that could prevent further gains for at least a while.

Yes, there is. The USD Index reached an important long-term resistance line created by major tops – the 2010 high and the 2013 high. In consequence, even though it seems that the only way that the USD can move is up the opposite seems to be much more likely for the short term.

At this point quoting comments from yesterday’s second Gold & Silver Trading Alert is appropriate:

Now, we know that gold hasn't reacted to the dollar's strength, but that doesn't guarantee that it won't react to the dollar's weakness. At this time it might seem that the only direction in which the USD Index can move (given that there are talks in the U.S. about increasing interest rates and the ECB has already lowered rates) is up. That's exactly why… It could correct at this time. Remember that when everyone gets on the same side of the boat, it's better to be on the other side. The cyclical turning point is here and the USD is extremely overbought from the short-term perspective.

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.

On the short-term chart we see that the breakdown was confirmed. The implications are bearish, but given the support present on the long-term chart and the proximity of the June low, we might see only a temporary move lower before another pause.

Since the size of the uncertain (given the situation in the USD Index) decline is not that significant and the chance of a corrective upswing is relatively high (again, because of the USD), it seems better to stay on the sidelines for a few more days. We will know much more once we see how gold reacts to the dollar’s weakness.

The situation in the silver market is twice as interesting and critical as in the gold market. The white metal has been consolidating for about a year and the move preceding the consolidation was a sharp and big decline. Once silver breaks below the previous lows, it could drop very far. The support is strong and perhaps that’s why silver is currently more reluctant to decline – it has moved less than gold this week.

The short-term chart still suggests a turnaround – the white metal is right at its cyclical turning point and is strongly oversold on a short-term basis. Even if we are to see much lower silver prices in the coming weeks (which is likely in our view), the white metal might need to correct – and rally – first.

What about mining stocks?

We recently wrote that since miners hadn’t moved below the declining support line, the situation hadn’t changed. It changed yesterday. The breakdown materialized on high volume, which is a bearish sign. The size of the decline and the miners’ underperformance relative to gold is also notable. Does the significance of the daily underperformance mean anything?

Not really. On the above chart we compared the prices of the HUI Index (gold stocks) with the price of gold and marked times when short-term declines in the ratio were particularly sharp (the Rate of Change indicator in the lower part of the chart was below 5). It turns out that this type of movement used to happen in the first days of declines, but also in the final days. Consequently, the fact that miners moved lower relative to gold at such a high pace doesn’t make the outlook clearer.

Comparing gold stocks to oil stocks, however, provides meaningful medium-term implications. It seems that the local top is already in as the ratio moved slightly above its 20-week moving average and reversed direction. This is the kind of action that preceded the late-2012 high and the early-2014 high. Please note that there was only one additional huge rally in the ratio – from late-2000 to late-2003 and during this time the 20-week moving average did a good job showing the true direction of the move – the move ended once the average was successfully broken in early 2014. The ratio was not broken recently, and the medium-term trend remains down.

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. The situation is only very tense for the short term. In this case, it seems that waiting on the sidelines is still appropriate – when in doubt, stay out.

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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