In yesterday's Market Alert we wrote that "with declining momentum and an already extremely oversold situation in mining stocks, at least a rebound is very likely and it's likely to be seen probably today or later this week with the emphasis on today or tomorrow."
Gold, silver and mining stocks moved sharply higher today, so the analogy between the current situation and previous cases when GDX ETF declined on huge volume is up-to-date. A rebound of some kind had been expected based on the extremely oversold situation that we had in the past few days (in fact, we still view the precious metals market as oversold in general at this time), but the key question is if the decline will continue after this rebound or will metals and miners finally rally.
Before we comment any further, let's examine what happened today that could have possibly triggered the rally (possibly, because there is never 100% certainty as to what caused one particular upswing). The "breaking news" on finance.yahoo.com is: US economy shrinks 0.1%, 1st time in 3.5 years. This is an important supplementary confirmation of what our Correlation Matrix has been signaling for some time. Namely, the safe-haven status of precious metals is back - previously, however, it meant declining interest when investors saw rising stock prices. This time, with bearish fundamental information about the economy and a good possibility of a short-term correction in stocks, the situation seems favorable for the next rally in metals and miners.
Naturally, this is bad for the USD Index and, as we emphasized several times in the past week or two, this is also very bullish for gold, silver and mining stocks.
After a very long consolidation in the whole sector, after a local bottom in gold below the 300-day moving average, after an extremely discouraging situation in mining stocks, and given a bearish short-, medium-, and long-term picture for the USD Index, it seems that all we need for a huge rally in precious metals is something to trigger it. We might just have seen such a thing today.
Our take is that the huge volume in mining stocks during Friday's decline marked the final bottom of this decline. If it didn't, we don't expect the bottom to be much below it. Still, the risk/reward ratio for miners and the rest of the precious metals sector is so favorable right now that we think long speculative positions are well justified.
Just as we indicated previously, a full long position is suggested for gold and silver, and also for mining stocks.
Naturally, we suggest remaining in the precious metals market with your long-term investments. We sustain our belief that platinum will continue to outperform gold in the following months and it's not too late to take advantage of that.
As you recall from last week's Market Alerts, we have recently expanded the Dictionary section on our website and now it includes related terms and dialogs that can help understand what a given terms means for gold and silver investors. Here are three more terms for you to look at:
As always, we'll keep you updated should our views on the market change. We will continue to send out Market Alerts on a daily basis (except when Premium Updates are posted) at least until the end of February, 2013 and we will send additional Market Alerts whenever appropriate.
Thank you.
Sincerely,
Przemyslaw Radomski, CFA
