Briefly: In our opinion short speculative positions (half) in silver and mining stocks are justified from the risk/reward perspective.

In the March 7 Alert, we wrote the following:

Our best guess is that the outcome of the voting will be that Crimea wants to join Russia. The only unknown here is the real reply of the West. The Western countries will say that they don’t find the voting constitutional – they are already saying that. The question is how much they will do about it. The Russian troops are already there.

The outcome is exactly as described above. We’re waiting what happens next. Our best guess is that the Russians will really strive to keep Crimea and to make sure that the areas next to Crimea will provide necessary services to Crimea itself. By “really” we mean that they might seem to aim for something much bigger – like attacking Kiev – only to accept the real goal, Crimea, as a compromise. In this case, we might see increased tensions and higher gold prices in the short term followed by a significant decline once the compromise is made.

As far as the technical picture is concerned, there has been some improvement, but it doesn’t seem that it will last. The most important factor is the situation in the Euro Index (charts courtesy of http://stockcharts.com.)

The Euro Index formed a bearish reversal candlestick in terms of weekly prices and its upper part moved through the declining long-term resistance line. The latter means that there was an invalidation of a breakout above this line. Basically all the factors are bearish.

Consequently, the index is likely to decline sooner rather than later and this could trigger a decline in the precious metals sector. Of course, if the situation in Ukraine gets worse, PMs might rally or the decline could be postponed, but at this time the tendency for this market seems to be to move lower.

Taking a look at the situation from the USD perspective provides a similar outlook.

The USD Index moved and closed the week below the rising medium-term support line. We could view this as an unconfirmed breakdown. It would have bearish implications if it weren’t for the fact that the dollar had already closed below it once and this was followed by a sharp upswing in the coming weeks.

Meanwhile, the copper market is still suggesting lower precious metals prices. On March 12, we wrote the following:

In today’s alert we would like to draw your attention to one of the markets that is not the part of the precious metal sector, but that has lead the precious metals quite often in the previous years – copper.

Copper broke below the rising support line many months ago, but it wasn’t until yesterday that it moved below the 2013 lows. The decline here seems to continue and the downside target is quite far away. Could copper decline so far? Of course – it declined even further in 2008.

As you can see on the above chart, the major price moves have taken place simultaneously in copper and the precious metals sector. Copper’s breakdown is therefore a bearish factor for the precious metals sector, which might simply follow copper lower.

Technically speaking, there is strong support in the $2.1 - $2.2 range, and if copper declines significantly, that’s where we expect the bottom to form. That’s quite far from where copper is today, so if precious metals are to move similarly to copper, they too might decline quite profoundly.

Copper has declined since the above was written and the remarks are very much up-to-date.

Gold moved higher also on Friday, but this didn’t change that much. The breakout above the 38.2% Fibonacci retracement level is not confirmed so far and the overall size of the marked area – meaning the time when gold was pushed higher by the situation in Crimea – is still quite small. At the moment of writing these words, gold is trading at $1,380 – just slightly above the 38.2% Fib. retracement. We are likely to see some kind of decline even if it is not a major one (and we think a major decline is still likely) since we haven’t had one for quite a long time and even the RSI indicator is suggesting an overbought condition.

We previously wrote that if silver closed below the 2008 high for a third consecutive week, it would have bearish implications. Silver closed the week basically right at this level, so it’s a tough call whether the breakdown was confirmed or invalidated. We’ll have to wait for the next weekly close.

Still, at this time we can clearly see that the situation in Ukraine didn’t push silver to new highs. The white metal continues to underperform overall even though it moved much higher in the first part of Friday’s session. It didn’t move to new highs and it erased a significant part of the early gains in the following part of the session. Silver has declined 10 cents in today’s pre-market trading as well (at least at the moment of writing these words).

On Friday miners moved slightly higher and on relatively low volume. That’s the second close above the 61.8% retracement level, but the miners’ limited reaction to gold’s daily rally suggests that miners need at least to take a breather. Of course the breakout by itself and the second daily close above the final Fibonacci retracement are bullish factors, but it seems they won’t be enough to keep miners at the current price levels if the Euro Index declines.

It seems that the precious metals sector will move lower in the coming weeks, but just in case the situation in Ukraine deteriorates, we are keeping half of the long-term investment position in gold. In fact, gold has been outperforming both silver and mining stocks since Russian troops entered Crimea.

If the precious metals market declines, it seems that short positions in gold will gain more than the long-term investment in gold will lose, and if the sector rallies, then gold’s appreciation – due to its outperformance – can more than make up for the loss on the short positions in miners and silver. Naturally, the above depends on the size of the positions, but still, it seems that utilizing this spread (long gold and short silver and miners) has been a good idea.

It seems to us that if it weren’t for the events in Ukraine, the precious metals sector would be already declining and perhaps testing the 2013 lows or moving below them. This could still take place and it’s quite likely to happen once the situation in Ukraine stabilizes.

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: Half position in gold, no positions in silver, platinum and mining stocks.

Insurance capital: Full position.

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.
Gold & Silver Trading Alerts