Briefly: In our opinion no speculative positions in gold, silver and mining stocks are justified from the risk/reward perspective.

Once again not much changed in the precious metals market yesterday – we continue to see back and forth trading and the question is if it’s a pause within a rally or a big top formation. Let’s take a closer look at the markets (charts courtesy of http://stockcharts.com.)

Gold’s indecisive trading is not rally visible from the long-term perspective. What we see here is a move to the rising resistance line and approximately to the 60-week moving average (gold is only slightly above it). The trend remains down despite what one might think based on the very recent price action.

If you’re starting to think that the rally was indeed significant, let’s see how it compares with other markets – bonds and other commodities.

The gold to bonds ratio moved only slightly higher and the overall trend is definitely down.

The same goes for gold’s price compared with the prices of other commodities. What we saw was not a real rally, but a correction within a downtrend.

The strength in gold stocks is more visible, though.

The most interesting thing at this time, however, is this week’s move lower. It took gold stocks back to the previously broken declining resistance line and verified it as support. Even though the breakout is rather small from the long-term perspective, such a pullback and verification are bullish signs. Are they strongly bullish? No, it doesn’t change that much, but it is one of the things that makes us hold back on opening short positions just now.

In case of the GDX ETF, where we have the volume data, we actually see that yesterday’s price action alone was slightly bearish. Yesterday we wrote the following about Wednesday’s price/volume action:

What’s so significant is the size of the volume. It was not only lower than on the previous trading day, when miners declined, but it was also lower than what we had seen in the past few days when miners rallied. It looks like a sign of a top – a confirmation thereof, or a sign that one will be formed shortly.

We saw the same signal once again and the volume was even a bit lower. Consequently, while from the long-term perspective the situation improved a bit, it deteriorated a bit from the short-term point of view. Overall, it remains rather cloudy and it seems to us that waiting for a confirmation of the next move’s direction is appropriate here before taking any action.

Before summarizing, let’s take a look at the currencies.

Yesterday, we wrote the following about the Euro Index:

The Euro Index moved above the declining resistance line, which was a very good reason for the precious metals market to rally – but it hasn’t. The breakout is not confirmed (and we don’t think that it will be confirmed), so the situation hasn’t become bullish. The lack of real reaction in the case of the precious metals sector is a bearish sign, though.

On the other hand, precious metals rallied significantly recently, so the fact that they are not rallying at this time doesn’t have to be bearish just yet – it could be the case that the metals and miners are simply taking a breather. That’s why we’re staying on the sidelines with the trading capital and waiting for additional confirmation before entering any position.

The above remains up-to-date, but today we would like to point out that the Euro Index reversed its direction and moved back to the declining very long-term resistance line. Overall, we don’t think that much changed (meaning that we can view the situation as if there was no breakout recently) and that the Euro Index will continue to move in tune with its long-term trend, which is down.

The analysis of the USD Index, and in particular its cyclical turning points suggests that we may not need to wait for long before the most recent trends reverse. In this case, we are likely to see a move higher in the USD Index and a move lower in the Euro Index and in the precious metals sector. If the USD Index rallies and precious metals don’t decline, then we will have a bullish confirmation; we don’t see such action now.

Finally, we would like to remind you several reasons for which it doesn’t seem that the final bottom in the precious metals sector is in yet:

• There has been no extreme underperformance of silver (relative to gold) and that’s something that we expect to see as a confirmation that the bottom in the entire precious metals sector is in.
• The size of the move preceding a consolidation is often quite similar to the one that follows the consolidation. On the HUI Index chart that we provided above, you can see that the late-2012 – mid-2013 decline is much smaller than the decline that started in March 2014. Now, a complete similarity would mean the HUI Index moving well below the 2008 low, but we think it might be an exaggeration to project a move this big, given that the 2008 low provides very strong support. That’s why we’re not projecting it to be even lower.
• Gold, and the rest of the precious metals sector is not extremely hated in the public media – when prices drop low enough the mainstream media will display headlines like “gold is over”, “gold – just how safe a $200 can be?”, “gold – the worst performing asset of the year” and so on. This will probably convince the final part of investors to sell… And that’s when the final bottom will form.
• We have not seen major support levels being reached in several precious-metals-related ratios. Say, the HUI:gold ratio moved quite close to its major (!) 2000 low in the late 2013, but not right to it.

We continue to expect more volatility to follow. We will be actively monitoring the markets and report to you accordingly.

Summing up, even though the precious metals sector moved much higher in the previous week, it seems that we are at or quite close to a local top in the precious metals sector. While the medium-term trend in the precious metals market is down, we were likely to see a corrective upswing – and we have. While in the past days it seemed that the corrective upswing was not over yet, we have some signs that it is over now. We have gold at a significant resistance line, we have short-term outperformance in silver, gold has made the headlines and its volatility is very low – and these are all bearish signs.

The only thing that seems exceptionally bullish at the first sight – the miners’ strength – is not really that bullish after one examines it more closely. We think that we will see a good risk/reward situation in the following days that will allow us to open a trading position in the precious metals sector, but at this time the short-term outlook is still too unclear.

To summarize:

Trading capital (our opinion): No positions

Long-term capital: No positions

Insurance capital: 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 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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