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

Gold moved up yesterday but silver and mining stocks moved only slightly higher. Of course, the signals that we saw in the junior sector and on which we commented in yesterday’s alert remain in place – they didn’t expire based on a daily small move higher. The signals that are based on patterns that have been present for at least 4 years help to detect major declines and, compared to previous declines following such signals, the move higher that we saw in gold yesterday was almost nonexistent. The most significant technical development was seen for the GDX ETF (charts courtesy of http://stockcharts.com.)

Miners moved slightly higher (above the previous February high) which took place on very low volume (in relative terms). That’s not how true breakouts are formed. This is something that accompanies “fakeouts” – fake moves higher that are followed by disappointment of bulls and significant declines.

The position of the RSI indicator surely suggests that this is the case now, but what’s even more significant is that the GDX ETF moved exactly (!) to its 61.8% Fibonacci retracement level and declined right thereafter. That’s the final classic retracement levels that means that the move higher is still a correction within a downtrend, not a new move higher. That’s what makes it so significant. There was no breakout above it, there was a small move to it (despite the moves in gold and in the general stock market being more visible) that took place on low volume.

It’s very likely that we will see another move lower soon. The key question is if this will be a small decline or a beginning of another major plunge.

As mentioned previously, gold moved higher in a more visible fashion, but there was no huge breakout above the previous February intra-day high. It was accompanied by average / average-low volume. The size of the post-consolidation rally is still in tune with what we saw in July-August 2013 – we marked it with green lines on the above chart.

Moreover, the RSI indicator is once again overbought. The daily decline that we have seen recently was not enough to cool the situation down and we are likely to see a more significant decline or correction.

There was no breakout from the gold to bonds ratio perspective either. The trend remains down.

We previously wrote that the currency markets pose a substantial threat to the precious metals market’s recovery and this comment remains up-to-date.

Basically, the February rally in the precious metals sector can, to a great extent, be explained by the USD Index’s decline. Overall, the USD is where it was in late September 2013 and so are precious metals and this month’s rally has been accompanied by a decline in the USD Index.

The U.S. dollar moved slightly higher but traders didn’t seem to “buy it” as it remained below the June 2013 low. However, if the rally continues, we are still likely to see a bigger decline in the precious metals market.

The medium-term USD Index chart suggests that we are still likely to see much higher USD values. The index is right at the long-term (or medium-term depending on one’s approach) support line and after a breakout. It’s an index just waiting to start a big rally. A rally in the USD Index to the 85 level or so would likely have a devastating effect on the precious metals market and this type of rally could be seen based on the above chart.

If the USD really rallies and gold refuses to decline, then we will be happy to conclude that the medium-term decline in the precious metals market is probably over. It simply doesn’t seem to be the case just yet.

We were asked to comment on the silver’s performance relative to gold and say whether or not the white metal is breaking out, so here we are.

Silver to gold ratio has indeed broken above declining resistance line, but… It had previously broken above two analogous resistance lines only to move a bit higher and decline once again. Consequently, we don’t view the above move as really meaningful.

To summarize:

Trading capital (our opinion): Short position (half): gold, silver, and mining stocks (we moved stop-loss orders slightly higher for silver and the GDX ETF).

Stop-loss details:

• Gold: $1,346
• Silver: $22.36
• GDX ETF: $27.9

Long-term capital: No positions

Insurance capital: Full position

Please note that we have started to include the insurance capital on the above list in order to avoid the impression that we suggest being entirely out of the precious metals market. Those of you who have been with us for a long time are well aware of this, but since a lot of new subscribers have joined us recently, we though a quick reminder should be useful.

We have suggested being out with one’s long-term investment capital, but being in as far as the insurance capital (physical precious metals holdings) is concerned. You will find details on our thoughts on gold portfolio structuring in the Key Insights section, but in short, it depends on your approach and experience. Below you will find a “portfolio” that we created for Eric – the fictional character that we use to illustrate suggestions (not investment recommendations) for beginning investors. More precisely, this was the portfolio before we suggested moving out of the precious metals market (so, before April 2013).

Now the “investment” category would be 0%, but the insurance remains at 44.1%. Please note that the average size for the trading position (we provide the netted amount in the above points regarding positions / trades) is just 1.4% of the entire capital in this case, so half of the position means using just 0.7% (11.8% is kept in cash / dedicated to trading but only a part of it is used for each trade). The entire portfolio report provides also 2 other fictional characters and their “portfolios”. John being the proxy for an experienced investor is the other extreme (Eric being the beginner). He “has” 17.6% in insurance capital and the average size of his trading position is 31.6% (half of which is 15.8%).

The bottom line is that if you assume that precious metals have much further to go (beyond 2011 highs) like we do, having just some money in the sector might appear as being out – and opening a small speculative short position in addition to it might seem as betting against it. When one looks at it from a “fresh perspective” without any assumptions about the gold bull and reads about shorting, they might get the impression that we suggest being entirely out of the market, which is not the case. Actually, the netted effect of small speculative short positions is simply hedging the insurance capital to a smaller or greater extent. It might be more than that if we suggest doubling the size of the short position, but that’s not the case just yet.

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