Briefly: In our opinion no speculative positions are justified from the risk/reward perspective.
In yesterday’s alert we wrote that the USD Index had probably not declined enough based on the cyclical turning point and that this was something that could trigger higher precious metals prices. We have indeed seen lower USD values and higher precious metals prices. Let’s take a closer look (charts courtesy of http://stockcharts.com.)
Gold moved higher once again and once again the volume was high when compared to the previous day when the yellow metal declined. The positive price-volume link remains in place and the implications remain bullish for the very short term. Please note that this upward correction is relatively small – it hasn’t even wiped out 38.2% of the March decline. Perhaps this is the level that will be reached before the next local top is in – we will watch out for signals confirming this theory.
For now, we can say that the current correction is quite similar to the small correction that we saw in September 2013 and this is seen also from the Australian dollar perspective. Back then gold was forming the right shoulder of a bearish head-and-shoulders pattern and the same is the case also today. Even the RSI indicator on the above chart shows similarity.
Not only is the similarity bearish, but so is the present head-and-shoulders formation. Please note that they have medium-term implications, not very short-term ones. Consequently, we could very well see some strength in the following days but much greater declines in the following weeks.
There’s not much new that we can tell about silver and mining stocks. Silver continues to underperform and miners are indeed moving higher, but they are doing so on rather low volume. It does seem that the current upswing is a corrective move, not a true rally. If silver finally rallies strongly relative to the rest of the precious metals sector it will quite likely not be a bullish sign, but a day when the entire sector tops (or very close to it). That’s not a clear prediction, just an early heads-up – we don’t think that jumping on the silver bandwagon as soon as it seems to be gaining speed is a good idea at this market juncture. There will be a time when silver rallies strongly and the rally will be sustainable, but it doesn’t seem we are at this point just yet.
Regarding the USD Index, yesterday we wrote the following:
The situation in the USD Index suggests at least a small pullback as the currency corrected to the 61.8% Fibonacci retracement level based on the 2014 decline, and it did so very close to the cyclical turning point. Moreover, we saw an intra-day reversal on Friday.
Consequently, the precious metals market might get a temporary boost from the USD market.
As you have already read above, the USD indeed declined. The move was not huge, so we might need to see additional declines before what has been likely to happen based on the turning point is over. This means that the implications for the precious metals market are still bullish for the short term, but not as strong as they were yesterday.
The USD Index declined very visibly on Tuesday, so the question is if the decline is completely over now. Unfortunately, it’s not clear at this time. We could see a re-test of the March low, but we could easily see a bottom right now. One of the reasons for the latter is the current position of the Euro Index (the EUR/USD exchange rate is responsible for most of the USD Index’s movement).
The euro moved to its 2013 highs once again and this level could very well stop the rally. However, even if it doesn’t hold, and the euro moves higher, it’s still not likely to rally far. The very long-term declining resistance line is very close and it’s very likely to keep the rally in check.
Consequently, the situation in the currency markets is rather unclear for the very short-term, just like it is the case in the precious metals market. When in doubt, stay out – and we are staying out, with no speculative positions at this time. The medium-term trend for the precious metals market remains down, however, so we are also out as far as long-term investments are concerned.
We plan to re-enter the speculative short positions in the coming days or weeks (most likely in the near future).
To summarize:
Trading capital (our opinion): No positions.
Long-term capital: No positions.
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
