In the last Premium Update we wrote that the chart featuring gold from the Australian dollar perspective was the most concerning one, as it was the only perspective from which a breakdown had been seen (in gold). This breakdown was invalidated, which by itself is a buy signal. Gold priced in yen rallied sharply once again yesterday and it's now attempting to move above its early-Feb high, which is also its all-time nominal high.
Overall, the situation in gold improved greatly this week - it was only several days ago when we wrote about the invalidation of the breakout in the gold:UDN ratio (the average of gold prices viewed from the non-USD perspectives) and we already see gold high enough to discuss the possibility of another breakout.
Silver didn't do much in the past few days, which is actually a good thing because it's about to reach its cyclical turning point. With silver not doing much now, the preceding move will remain "down" which means that turning point's implications will be bullish. If we get a rally before the cyclical turning point, then the implications will become unclear as we have already seen one local bottom recently.
We have just seen a repeat of the long-term buy signal from the SP Gold Bottom Indicator - the indicator moved back above its signal line. This makes the case a bit more bullish, as (according to the indicator) we now have 2 weeks of rallying ahead of us, then we're likely to see a consolidation for about 3 weeks and then a major rally in the following month. This is based on the average performance of the market after such signals were seen in the past and you can examine it here. At this time, however, the precious metals market is particularly oversold, so the rallies could be even more significant and the consolidation could be shorter.
At the same time, mining stocks remain below their key support/resistance line and the Fibonacci retracement level. The technical situation for the mining stocks is bearish on its own. However, we have just seen a long-term buy signal. We have seen strength in gold and an invalidation of the breakdown in gold priced in Australian dollars. Additionally, it might be the case that a breakdown below such an important support line should be confirmed by 3 weekly closes, not only daily ones, or by a more significant move below it.
Consequently, at this time we think that staying with positions outlined in the latest Premium Update is appropriate.
This means the following:
- Half of the speculative long position in gold, silver and mining stocks
- Full long-term investment position in gold and silver and half of it in case of mining stocks.
You are probably reading other reports on the precious metals market and you are aware of the fact that analysts are now either very bullish (those following gold and/or the fundamental picture) or very bearish (those following momentum and/or focusing on mining stocks technicals). So, is the market likely to trade sideways, which would be an average of the above? No. Sometimes averages lie. In this case we should also keep the volatility implications in mind. With either a big move up or a big move down ahead, the volatility in gold is very likely to increase - and this would be the case in both above-mentioned scenarios. Therefore, trading sideways in a small trading channel is unlikely - either a breakout or breakdown is, and the situation is not calm on average - it's extremely tense.
Our best guess is that miners will invalidate their breakdown shortly and a powerful rally will start. This is only a best guess, however, and we will have to wait for this to happen to really get back to the full long position in the mining stocks and to add to the long speculative positions in the whole precious metals sector. The final suggestions remain as outlined above (and in yesterday's Market Alert).
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
