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

We previously emphasized that the situation in Ukraine was the main bullish factor for higher precious metals prices (mainly for the price of gold) and that remains to be the case. However, even though the situation didn’t improve, precious metals moved decisively lower on Friday. This does not bode well for the precious metals market, but let’s examine the key charts before making the final call (charts courtesy of http://stockcharts.com.)

Based on Thursday’s closing prices, we wrote the following:

The volume was very low during yesterday’s upswing, which has bearish implications. We wrote the same yesterday, but this time the implications are clearer as the rally was clearer as well. Bigger rally + very low volume have more bearish implications than a rather small rally on the same volume levels.

On Friday gold declined on relatively strong volume, which is another confirmation of the bearish outlook. The yellow metal now follows the rally-on-low-volume-but-decline-on-high-volume pattern, which is a bearish phenomenon. High volume usually tells the true direction of the market and in this case it’s down.

The same was the case in the silver market and for mining stocks. Let’s take a look at the latter.

As you can see on the above chart, the GDX ETF moved higher on low volume but declined (on Friday) on relatively high volume. Again, the implications are bearish, especially that the past few weeks have been similar to the July and August 2013 topping patterns.

Silver also moved lower – in fact, most decisively in the whole sector. It is now well below the 2008 high and it was the second weekly close below it. Silver is currently below the $21 level. For the bearish outlook to be confirmed (and for us to increase the size of the short position in silver), we would like to see a move below the rising long-term support lines – marked in black and grey on the above chart. They are close to where silver is now, so we may see further deterioration relatively soon.

Meanwhile, what we wrote about the USD Index regarding the medium-term perspective remains up-to-date:

The USD Index declined below the previous 2014 low (while gold, silver, and mining stocks didn’t move above their 2014 highs), but this “breakdown” doesn’t really have bearish implications. Similar “breakdowns” were followed by significant rallies back in October and December 2013. The breakdown is not confirmed in a technical sense, and it seems doubtful that it will be followed by more weakness or that it will really be sustainable.

From the short-term perspective, we see that the USD Index declined on Friday but quickly moved back up. It moved to the December 2013 lows, which proved to be support. The most important thing visible on the above chart is the presence and proximity of the cyclical turning point. The USD Index is now right after the turning point, and the preceding move was definitely down, so a turnaround here seems very likely.

All in all, what we wrote previously about the outlook for the precious metals sector remains up-to-date. It doesn’t seem that keeping a full long position in the investment category is justified at this point in our view. Based on last week’s events and what had happened over the weekend it was likely that gold would move much higher – but its reaction has been very weak. It looks like there will be no rally in gold before a bigger decline. We are keeping half of the funds in gold, though, just in case the next days bring improvement (or perhaps the tensions in Ukraine would increase). If not – things will become even more bearish and we will likely adjust the position once again.

We might suggest changing the short-term speculative position and / or the long-term investment one shortly, based on how the markets react and what happens in Ukraine. We will keep you – our subscribers – informed.

As a reminder, we have just posted an important report on the role of rebalancing in the case of the mining stocks sector. It compares the buy-and-hold approach with a strategy including “some rebalancing,” and with another one based on “rebalancing using Golden StockPicker and Silver StockPicker”. These tools were based on strong financial and statistical foundations, but now – after years of these tools being available – we can evaluate their performance and usefulness. While we were certain that they were useful because of the theory backing them, the results are even better than we had expected. As a reminder, as our subscribers you have access to both tools in the current Gold & Silver Trading Alert package (previously known as the Premium Service).

To summarize:

Trading capital (our opinion): Short position (half): silver and mining stocks.

Stop-loss details:

• Silver: $22.60
• GDX ETF: $28.90

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