The precious metals sector rallied quite significantly yesterday, but gold didn't do much from the non-USD perspective. There was no breakout in the gold:UDN ratio chart. However, silver viewed from the non-USD perspective has invalidated its breakdown. This invalidation is not surprising. Quoting from the last Premium Update:
In the medium-term chart of silver from a non-USD perspective, we see a breakdown on huge volume following a much smaller breakdown. This is not a major concern at this time. RSI levels are still below 30 and this level previously coincided with local bottoms. This chart suggests that the local bottom is in and the outlook is therefore bullish even though technically a breakdown has already happened. Such has been the case three times in the past as well (where a breakdown has actually led to a bullish outlook).
The S&P 500 Index has been recently trading sideways below its 2007 high, gathering strength to jump above it. We have previously written that a decline in stocks would likely trigger a rally in the precious metals sector. At this time, however, it seems that the rally could be seen even without a decline in the stock market. In the past few days (last 2 days and the part of Friday's session when stocks moved back up) we have seen gold moving higher along with stocks. The short-term influence (if any) is unclear at this point, but the situation in gold surely is bullish.
The HUI and XAU Indices are back above their key Fibonacci retracement levels (the 61.8% correction of the 2008-2011 rally and the 50% correction of the 2000 - 2011 rally), so the breakdown seems to have been invalidated. The critical level for the HUI Index in this case is 337 and the index closed above 338 yesterday. Was that really the case? These were not the only major breakdowns that we have seen recently.
The HUI Index has also broken below the rising long-term support line based on the 2000 and 2008 bottoms. Since this line is rising, it moved slightly higher in the past few weeks. It’s now approximately at the 338 level. Consequently, it's not clear if the breakdown has been invalidated or not. And if we don't see that the breakdown has been invalidated from a long-term perspective, then it most likely hasn't been invalidated.
So, while the situation improved yesterday for the whole precious metals sector, mostly because mining stocks invalidated breakdowns below their key retracement levels, the key issue is still in place. In yesterday's Market Alert we provided our best guess scenario and it's still up-to-date:
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).
Yesterday's rally took place on relatively small volume in the GLD ETF, which is somewhat concerning. Our self-similarity-based tool is still pointing to lower prices at this time - the rally was not big enough to convince it that the decline is over. Still, if we get a breakout above the $1,590 level in gold and the breakdown in mining stocks is really invalidated, we will very likely suggest going back to full investment and speculative long positions in the whole precious metals sector. We might even suggest doubling the regular long position - after all, this will be the time to be brave as the vast majority of the investors will still be afraid to go into the precious metals market even after the above-mentioned signals have been seen.
For now 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.
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
