The precious metals market moved lower yesterday. We wrote that we were concerned with small volume during Tuesday's rally - and it was indeed followed by lower prices. We will get back to the likely reason for this decline a few paragraphs later.
Gold seen from the Australian dollar perspective is once again below its key support levels (naturally, the breakdown had not been confirmed). There has neither been a breakdown nor a breakout from the non-USD perspective. From our regular USD perspective, gold moved lower as well, but it didn't move below the previous low - it corrected some of the gains that it made earlier this week.
The major news yesterday was that the S&P 500 Index closed above its 2007 high. We have an unconfirmed breakout. If it manages to close above it today and tomorrow, the breakout will be confirmed. The financial sector (Broker/Dealer Index) moved above its 2012 and 2013 highs as well.
Another piece of information that we read on finance.yahoo.com was that Goldman Sachs is telling their clients to short gold, lowering their price forecasts for the yellow metal at the same time. You can read more about it here.
Generally, the argument was that gold didn't respond to positive factors as strongly as it should have and this makes the situation bearish. We agree that in general it is a bad sign for any market when it doesn't reply to positive factors. If we had seen such signals following a significant rally, we would probably simply agree and suggest opening short positions as well. But gold is now after a lengthy consolidation, heavily oversold on a short-term basis, the investors' and traders' sentiment is very negative (this goes double or even triple for mining stocks) and the market's response could be far from normal.
Still, it might be the case that Goldman's bearish comments scared investors and caused them to sell or - as Goldman analysts suggested - short gold. This, or the information about official gold sales on Cyprus, might have been the main reasons for which gold declined so heavily yesterday and not necessarily because of the S&P 500 Index's breakout. At this time it's unclear whether a continuation of the rally in the main stock indices will have a bearish impact on the precious metals market. Overall, stocks moved higher in the past 5 days and gold is also higher right now than it was 5 days ago.
Based on Tuesday's and Wednesday's closing prices, our self-similarity-based tool is now suggesting higher precious metals prices without a move below their previous April lows. In fact, it has flashed a buy signal for gold and silver. This is a major change to what we saw in the previous weeks and a significant improvement.
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 (based on our indicators)
- 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
