Briefly: In our opinion no speculative positions are now justified from the risk/reward perspective.

We wrote that the previous session had changed quite a lot in the precious metals market, but what happened yesterday was way more important. Gold soared in the pre-market trading but gave away a large part of the previous gains and miners actually lost almost 2% even though they rallied initially. Meanwhile, silver moved much higher. Let’s take a closer look at the most recent changes (charts courtesy of http://stockcharts.com).

From the long-term perspective, the breakout was insignificant and by no means confirmed. Consequently, what we wrote previously remains up-to-date:

On the long-term chart we see that even though gold moved higher – slightly above the rising resistance line – it remained below the declining red (dashed) resistance line. From this perspective, not much changed yesterday. We still think that the medium-term trend remains down.

It’s [staying on the sidelines] not “missing the boat” – it’s “waiting for the captain to set the final direction before you jump on the deck”.

On the above short-term chart we see a breakout and an immediate invalidation thereof. To be more precise – it was almost invalidated. The price of gold moved visibly above the 61.8% Fibonacci retracement level, but reversed before the session was over. Yesterday, we wrote that the confirmation was the key word here, the breakout was definitely not confirmed. In fact, we expect it to be invalidated shortly.

Mining stocks declined significantly yesterday, and it’s particularly visible relative to gold.

Yesterday, we featured the XAU Index to gold ratio. We wrote the following:

The most recent rally was significant, but there was no visible breakout above the declining resistance line. On the above chart we see a small, insignificant move above this line, but it’s too small to be viewed as a real breakout. In our opinion, this situation actually shows that the miners to gold ratios might be ready to move lower once again, since at least one of the resistance lines has been reached (it hasn’t been reached in the case of the HUI to gold ratio).

The above-mentioned small breakout has already been invalidated. Naturally, the implications are bearish.

In the case of the GDX:GLD ratio, we haven’t seen a real show of strength – we just saw a move to the resistance levels, and a move even lower in the following part of the market session.

Yesterday, we wrote the following:

On a short-term basis, we saw a sharp daily move higher, but the next short-term resistance is just around the corner. A further one – the August 2013 high – is also quite close. All in all, it will take more strength from the mining stock sector to truly break out and prove that we are seeing a major improvement.

Miners haven’t showed real strength. Instead, they just touched the resistance level and moved back down.

As far as miners themselves are concerned, here’s what we wrote yesterday:

Mining stocks have broken above the declining resistance line. The volume does not provide confirmation just now, but based on today’s pre-market upswing in gold it seems that this might change shortly. The “problem” with this rally is that it could end as soon as this week as the resistance levels based on September 2013 high and the March 2014 high are quite close. That’s one of the reasons why we’re not going long with the short term in mind.

It seems that this “problem” with the rally has just become reality. The rally might already be over. The lower of the resistance level was just reached and we might have just seen a local top.

The situation in the USD Index and the juniors sector continues to support the bearish outlook for the precious metals sector (what we wrote yesterday about it remains up-to-date). The same goes for silver.

The strong, long-term resistance levels were just reached. Since the medium-term trend remains down (lower highs), we can expect the next move lower to begin shortly. The short-term picture supports this outlook as well.

Not only has silver outperformed gold and miners on a very short-term basis, but it is now very close to the next turning point. The previous move was definitely up, so the turning point has bearish implications.

Summing up, yesterday’s improvement in the outlook for the precious metals sector turned out to be very temporary. The situation in silver – especially its move to the resistance lines – has bearish implications. The reversal in mining stocks is even more profound and bearish. We are very close to re-opening the short position at this point. However, since the precious metals showed unexpected (and unlikely) strength recently, we remain a bit skeptical toward the bearish signs at this time. It seems best to take advantage of the fact that the trading week will end today. We’ll do it by waiting on the sidelines today and then and analyzing the situation once again before Monday’s open with the benefit of having the weekly closing prices, which should make things clearer.

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 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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