Briefly: In our opinion short speculative positions (half) in silver and mining stocks are justified from the risk/reward perspective.
Gold moved above the previous 2014 highs yesterday, while mining stocks did not and silver is far from doing so. The biggest change, though, was seen on the Euro Index chart. Let’s start with this chart (charts courtesy of http://stockcharts.com.)
The euro has moved higher recently, above the lower of the declining long-term resistance lines. The most important thing to keep in mind now is the fact that the upper of these lines – the more important one – has not been broken, and it is very close to where the euro is right now. More precisely, the euro was close to the declining resistance line yesterday, but in today’s pre-market trading it has moved higher and is right at this line.
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.
As mentioned previously, gold has indeed rallied, and it has moved above the previous 2014 high, however, there has been no breakout above the first Fibonacci retracement level based on the 2013 decline. Technically, this year’s rally is just a big correction within a downswing. Back in August, gold moved slightly below the 50% retracement, and topped there, so perhaps we don’t have to see gold reaching the 38.2% retracement for the top to be formed. The volume during Wednesday’s rally was significant, so another daily rally here – possibly to the 38.2% retracement – would not surprise us.
In the red rectangle, you can see the part of the rally that has taken place since Russian soldiers entered Crimea. The rally is present, but it’s relatively small. Based on possible repercussions and how the situation is evolving, we might have seen a $100 rally or even a greater one. We haven’t and the implications are bearish – it looks like gold is simply waiting for the situation in Ukraine to stabilize before declining.
With today’s rally in the euro and gold, the latter is quite likely to move to the Fibonacci retracement at $1,377.
Interestingly, when we compare the price of gold with the prices of other commodities, yesterday’s rally and breakout are: barely visible and nonexistent, respectively.
We can say the same about the silver chart. The white metal isn’t even close to its previous 2014 high. It indeed moved higher yesterday and this week overall, but compared with gold’s reaction it’s not significant. Plus, silver remains below the 2008 high.
The mining stocks’ performance is somewhere between that of gold and silver. Miners are at their 2014 highs, but are not above them. The 61.8% retracement has kept the rally in check. In other words, gold is making new highs while miners don’t and this is a bearish sign.
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 miners’ and silver’s move up. The above depends on the sizes of positions, but still, it seems that utilizing this spread was a good idea.
Based on where the Euro Index and gold have moved today in pre-market trading, we might have seen or perhaps will see a local top today. However, based on the situation in Ukraine, we choose not to close the long position in gold as far as long-term investment capital is concerned.
To summarize:
Trading capital (our opinion): Short position (half): silver and mining stocks.
Stop-loss details:
- Silver: 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.
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