After yesterday's (relatively small) decline, the gold:UDN ratio is once again at the resistance/support line that we mentioned yesterday and featured in the latest update. Overall, we had some back and forth movement this week, without any important changes - and what we wrote in Friday's Premium Update remains up-to-date.
The general stock market moved higher yesterday and closed slightly above the previous March high (taking closing prices into account). The move higher materialized on relatively low volume, though, as measured by the SPY ETF and DIA ETF. Please keep in mind that the major resistance level for the S&P 500 is very close in the form of the 2007 high. If we see a confirmed breakout above this level, we will likely see further rallies. However, if the breakout is invalidated shortly, or stocks don't manage to move above it at all, we could easily see a move to 1450 or so in this index. In fact, we saw two similar corrections in 2012 and in both cases stocks were not as overbought on a medium-term basis as they are right now (as measured by the RSI indicator).
Precious metals, still being an anti-asset today (moving on average in the opposite direction to main stock indices and the USD Index), would likely benefit from such a correction on the stock market.
Our best bet is that stocks (S&P 500) will move higher until the end of the week, perhaps moving to the 2007 high. Then, over the weekend, when families meet and discuss various topics, the economy and stock market will be one of them in many cases. We didn't conduct a thorough research on that but based on several cases, it seems that after markets close due to holidays, in the following days they move more in tune with their fundamental situation. This makes sense as people ask their friends/relatives for advice or comments on their investments and friends help them get away from the day-to-day price swings and look at the market more objectively. In this case, we have an overbought situation on the stock market, discouraged gold investors and the fresh memory of the recent Cyprus events showing that governments in trouble can take away people's money. Investors don't really think that the latter was a big deal, but we get the feeling they might be more inclined to thinking this way after taking some time to consider the situation.
In general, most investors think that gold can be confiscated (thus it's risky) and bank deposits are insured, guaranteed, and safe. Try to tell that to those who chose to put more than 100,000 euros in Cypriot banks instead of buying gold and silver.
Speaking of gold confiscation, this issue comes back every now and then (and no wonder, it's an important issue) and today we realized something about it. Why does everyone focus on the possibility of gold being confiscated and not even mention that possibility in case of other assets? How often do you hear about someone choosing not to purchase a house because it could be confiscated? A significant amount of money was just confiscated on Cyprus. In fact, with quantitative easing programs, the governments are gradually confiscating the fiat money through inflation. Can governments confiscate stocks? It's more complicated, but you can easily think of a mutual fund being closed by the appropriate authorities and their investors bearing the cost. Is real estate safe from confiscation? Governments could for instance force people out of their homes based on an epidemic threat regardless of whether it's real or not (bird flu?). A less drastic way would be to impose a huge property tax - it wouldn't technically be a seizure, but if you had to pay $2M tax for a $1M home, then the effect would be practically the same. Ridiculous? Recall that one time the deposit margin for palladium futures was higher than the worth of palladium in that contract.
Full speculative long positions are suggested for gold and silver and mining stocks.
Naturally, we suggest remaining in the precious metals market with your long-term investments. In particular, don't let the bearish analyses, declining prices or sideway moves make you sell your long-term precious metals investments. It's a good time to be adding to the long-term gold & silver investments, not a bad one.
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 April, 2013 and we will send additional Market Alerts whenever appropriate.
Thank you.
Sincerely,
Przemyslaw Radomski, CFA
