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

As we wrote yesterday, the most important thing that has been driving gold this week is not the technical picture, but the situation in Ukraine. The Russian invasion of Crimea and the threat of war put pressure on stock indices around the world and caused gold to rally (there is rarely a time when we can really say what’s behind a given price move, but it seems that the situation on the Ukraine is the main factor at this time).

When the situation stabilizes, and we think and hope that it will, then gold’s rally will stop and quite likely turn into a decline. We think that gold would be declining right now if it weren’t for this weekend’s events. Let’s take a look at yesterday’s rally (charts courtesy of http://stockcharts.com.)

Yesterday we wrote that gold was likely to outperform other parts of the precious metals sector and this is what we saw during the session. Gold rallied on relatively significant volume and the move was quite visible by itself.

Again, it was not something that was likely based on the previous price/volume action (in fact gold had moved higher on low volume and lower on high volume), but the increased tensions in Ukraine triggered another upswing. At this time it seems that gold could move to the first Fibonacci retracement based on the entire decline (marked in green).

Actually, based on what happened during the weekend and how the situation in Ukraine is already escalating (more mutual threats, like Russia’s threat to sell all U.S. bonds and stop using U.S. dollars as a reserve currency), gold’s reaction is quite weak. Russia is not the biggest holder of U.S. debt, but still, the markets’ reaction could be significant.

After the weekend’s events, we expected to see a bigger rally yesterday with a continuation of the rally in the overseas markets after the U.S. close. We have a Russian invasion on Ukraine and a threat of a global conflict and gold has already corrected most of yesterday’s rally in today’s pre-market trading. This could be a just a correction, and we will monitor the market to see more strength or weakness, but if gold ceased to rally despite rising tensions then it would imply that it is very likely to plunge once the tensions subside. For now, it seems that gold is likely to move even higher as tensions increase.

Silver rallied just a little yesterday and it actually corrected this move in today’s pre-market trading (at least that’s what we see at the moment of writing these words).

This means that what we wrote yesterday remains up-to-date:

Meanwhile, silver invalidated the breakout above the 50-week moving average, the 2008 high and the 61.8% retracement level based on the entire bull market. The weekly volume is highest in months, which confirms the significance of the invalidation. Actually, the last time we saw volume that was similar was at the beginning of the previous decline in mid-2013.

Silver is still above the declining red support line, but drawing an analogous line in mid-2013 would also have given us a breakout that turned out to be a fake one.

The mining stocks’ reaction was also weak yesterday. The volume was not tiny, but it wasn’t that big either. Compared to what we had expected based on news from Ukraine, it was weak. Miners didn’t move above the February high and even gave back half of the early rally before the end of the session. We can see a breakout if gold leads the way, but it looks like the sector “wants” to decline.

Meanwhile, the USD Index moved higher after the decline to the lower of the rising medium-term support lines. What we wrote yesterday remains up-to-date:

While the short-term support line was broken, the lower medium-term support line held. This support has been in place for more than a year – it stopped a decline first time in early 2013. This is the 4th time that a decline is being stopped by this support (if it is indeed stopped, that is). Since the medium-term support (that already worked a few times) is much stronger than the short-term one.

The most important thing, however, about Friday’s decline is the way precious metals reacted to it. One might have expected precious metals to rally, but they didn’t. They declined and so did mining stocks. This is a very visible short-term underperformance and it suggests that lower values are to be expected for precious metals.

Yesterday we wrote that tensions rising in Ukraine could be a trigger for another sizable decline, however, the way markets moved on Monday makes us doubt that. Monday’s rally alone suggests that the move higher in gold will not be as big as previously expected and that gold “wants” to respond to bearish signs more dramatically than to bullish ones. Silver and mining stocks provide confirmation of the above outlook.

We were asked why we had decided to get back in with the long-term investments (and, by the way, we don’t use stop-loss orders for this kind of position) if we didn’t think that the move would last. It has to do with our general approach toward long-term investments in the precious metals sector (if you haven’t already, please read our gold portfolio report for more details) which we still think is in a major bull market (but also in a major correction within the bull market). The risk here, in our view, is to be out of the market. Therefore, if we think that there is a 60% opportunity that the market will decline, we might decide to still remain in it. Another factor is the projected size of the move. Based on what had happened over the weekend, we were expecting a greater rally in gold than what we saw (at least a $50 one). At this time, a rally of such magnitude is still likely, but Monday’s reaction makes us particularly alert to more signs of weakness.

We were also asked this: how low can HUI go if this is indeed the local top in the mining stocks, if another sizable downswing materializes? We think that it could move close to the 2008 low, but a lot would depend on what gold would be doing at that time. If the tensions in Ukraine escalate and there is a huge threat of World War III, we would likely not see moves below the previous lows.

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.

To summarize:

Trading capital (our opinion): No positions.

Long-term capital: Full position in gold, no positions in silver, platinum and mining stocks.

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. Of course the above is not an investment advice and consulting an investment advisor before taking action regarding your portfolio is encouraged.

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