Briefly: In our opinion no speculative short positions in gold, silver and mining stocks are currently justified from the risk/reward perspective.
Gold stocks underperformed gold on Friday and this was yet another day when we saw this kind of action. Silver, however, held up relatively well. Does the white metal tell us something else than gold miners? Will gold really decline in a meaningful way shortly?
In short, that’s still a probable outcome. Silver might have not declined in the last few days, but it’s now at its cyclical turning point, which makes it likely to decline relatively soon.
Before we move to the silver chart, let’s take a look at the USD Index and gold (charts courtesy of http://stockcharts.com).
The USD Index moved lower on Friday, however, since the rising support line was not reached, it seems that we could see another very short-term downswing that would be followed by a bigger move up.
Without a breakdown here, the short-term trend, and thus the outlook, remains bullish.
In the recent alerts we wrote that one of the things that could make the outlook for gold much more bearish was its ability to decline regardless of what was going on in the USD Index. In Thursday’s alert we emphasized that: gold indeed declined along with the USD Index yesterday, but it doesn’t seem that this was significant enough to indicate a new tendency. That was just daily price action, and since gold’s previous upswing was very sharp and significant, a daily pause is something natural – it doesn’t have to imply anything more.
The move was invalidated in both the USD and gold on Thursday, so overall not much changed in the gold-USD link in the past 2 days.
On Friday, however, gold declined along with the USD Index, so perhaps we are seeing a start of a disconnection of the two markets. Just like it was the case previously, we will need to see more of this kind of performance to say that gold can decline significantly without the dollar’s help.
Consequently, at this time, we remain skeptical toward the gold’s ability to decline regardless of the U.S. dollar’s price swings.
Nothing changed from the long-term perspective, so our previous comments remain up-to-date:
Let’s keep in mind that gold remains in a medium-term downtrend and could move even higher in the short term (to $1,250 or so) and still remain in it. In other words, another short-term rally here would not invalidate the bearish medium-term outlook.
On the short-term basis we don’t have much new to comment on. Gold moved lower in the last few trading days, after the previous sharp rally, but the decline took place on relatively low volume, so it could be the case that what we’re seeing now is a pause within a short-term rally. Overall, the above picture doesn’t provide us with clear implications.
The gold to USD Index ratio continues to have bearish implications for the medium term (the breakdown below the 2013 low and the 2008 high was not invalidated) but it also “says” that gold could rally a bit higher before it turns south once again. The reason is that the ratio hasn’t moved back to the resistance level just yet, even though it’s close to it.
We have the same implications from the analysis of the non-USD gold price. The medium-term resistance was reached (the 61.8% Fibonacci resistance level), but the previous 2014 wasn’t, so we could still see some strength in the coming days, but are likely to see lower prices in the coming weeks.
Let’s move to silver.
As mentioned earlier, silver’s lack of real declines is not really encouraging because it means that the current turning point has bearish implications.
Comments from Friday’s alert remain up-to-date:
Silver moved above its declining short-term resistance line just before its cyclical turning point. This is actually a bearish combination. Silver is known to flash fake buy signals (often in forms of various breakouts) just before taking another dive. This could be the case also this time.
In other words, viewing silver’s breakout as bullish might be premature at this point.
The situation didn’t change, but since we moved 1 day closer [once again] to the turning point without a decline, the latter becomes even more probable.
The gold stocks to gold ratio declined once again on Friday and the bearish implications that this situation has are now a bit stronger.
Our previous comments on the ratio remain up-to-date:
The above chart features the HUI to gold ratio. We marked the areas when gold rallied but the ratio declined at the same time (which is what we have been seeing for the last 3 weeks or so). It turns out that in almost all cases (and the only exception was seen when the decline in the ratio was very small, which is not the case right now) this was what preceded local tops and subsequent declines.
Meanwhile, the gold stocks to oil stocks ratio has just provided us with us with a sell signal. The last 3 local tops were seen when the ratio moved to or slightly above the 50-week moving average, and that’s what we saw last week.
Before summarizing, let’s take another look at the situation in the bond market.
It hasn’t changed, but it’s very important to keep in mind the implications as the move in the ratio between the yields of 20-year and 1-year bonds was extremely big and sharp.
Sharp declines in the yields of 20-year bonds relative to the yields of 1-year bonds are something that marked or preceded important tops in the precious metals market. The slide in the value of the ratio that we have just seen was enormous, which is a significant bearish signal for the precious metals market. Please note that we didn’t see such a signal at the end of 2013.
Overall, we can summarize the situation in the precious metals market as we did in Friday’s alert, with a note that the situation is now a bit more bearish (because of an additional day of gold stocks underperformance and silver moving to its turning point) than it was before but still too unclear to open any positions:
Summing up, there are many factors that are currently in play that have contradictory implications, which makes the short-term outlook rather unclear, even though the medium-term one remains bearish.
We have not seen silver’s huge underperformance and gold is not hated in the financial media (at least not very significantly) and long-term charts are showing declining trends. We could see some short-term strength in gold based on various factors, but at this time it’s too early to say that the next big upswing is underway. Most sings point out that the current rally in gold is simply a correction within a downtrend.
The thing that could generate a bigger upswing in gold is a big decline in the USD Index, and the latter could actually happen based on the resistance level being reached and that might happen relatively soon. However, the USD could move even higher – to the rising green support line – and we could also see gold’s move lower take place regardless of the situation in the USD. Perhaps gold is rallying not because of its inner strength (weak performance of mining stocks suggests that the sector is not really strong), but because it got too low too fast and simply had to correct.
It our view, the best approach is to continue to monitor the situation and take action once it clarifies. Gold’s ability to decline regardless of what’s going on in the USD Index would be a perfect bearish confirmation, but we have not seen it so far. If USD Index moves above the 90 level and holds it, then we would likely see an even greater rally and another big downswing in gold, anyway.
We’ll keep you – our subscribers - informed.
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.
As a reminder – “initial target price” means exactly that – an “initial” one, it’s not a price level at which we suggest closing positions. If this becomes the case (like it did in the previous trade) we will refer to these levels as levels of exit orders (exactly as we’ve done previously). Stop-loss levels, however, are naturally not “initial”, but something that, in our opinion, might be entered as an order.
Since it is impossible to synchronize target prices and stop-loss levels for all the ETFs and ETNs with the main markets that we provide these levels for (gold, silver and mining stocks – the GDX ETF), the stop-loss levels and target prices for other ETNs and ETF (among other: UGLD, DGLD, USLV, DSLV, NUGT, DUST, JNUG, JDST) are provided as supplementary, and not as “final”. This means that if a stop-loss or a target level is reached for any of the “additional instruments” (DGLD for instance), but not for the “main instrument” (gold in this case), we will view positions in both gold and DGLD as still open and the stop-loss for DGLD would have to be moved lower. On the other hand, if gold moves to a stop-loss level but DGLD doesn’t, then we will view both positions (in gold and DGLD) as closed. In other words, since it’s not possible to be 100% certain that each related instrument moves to a given level when the underlying instrument does, we can’t provide levels that would be binding. The levels that we do provide are our best estimate of the levels that will correspond to the levels in the underlying assets, but it will be the underlying assets that one will need to focus on regarding the sings pointing to closing a given position or keeping it open. We might adjust the levels in the “additional instruments” without adjusting the levels in the “main instruments”, which will simply mean that we have improved our estimation of these levels, not that we changed our outlook on the markets. We are already working on a tool that would update these levels on a daily basis for the most popular ETFs, ETNs and individual mining stocks.
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.
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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief
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