After we sent out the Market Alert on Friday saying that half of the gold and silver holdings as well as the entire mining stock position should be closed/hedged, these markets moved even lower. They are also moving lower today.
No matter if we take gold from the USD perspective, average non-USD perspective, or gold priced in individual non-USD currencies, we will see that the price has broken below the key support levels. Only gold priced in the Japanese yen stayed above the 2011 high, but based on today's pre-market decline it seems that it will be broken too.
The short- and medium-term outlook for gold is now bearish. The closest significant support level is currently close to $1,350. Can gold reach it shortly? Yes it can and it can happen quite soon given today's and Friday's volatility.
What about silver? On Friday it moved insignificantly below some support levels (intra-day 2011 and 2012 lows) but it moved more significantly below other important levels: 2011 and 2012 lows based on weekly closing prices. More importantly, it moved below all the above-mentioned levels significantly today. At this time silver confirms the bearish outlook for gold.
The 2008 high is $21.44 and this is approximately where the 61.8% Fibonacci retracement level (for the entire 2001 - 2011 rally) is located.
As it is visible on the HUI Index chart in the latest Premium Update, the next support for the mining stocks is at 266 (HUI), and this is where miners are likely headed next.
Consequently, we suggest closing the remaining investment position in the precious metals sector (gold, silver, platinum). At this time - for the first time ever - we suggest no long-term investment position in the precious metals sector.
As far as speculative trading capital is concerned, we subjectively think that this is a shorting opportunity of gold, silver and mining stocks. Our SP indicators suggest otherwise at this time but the self-similarity-based tool has flashed a sell signal suggesting another $100 drop in the coming weeks (and a bottom in the first half of May). At this time, it seems that the new tool is better equipped to deal with the new stage of the bull market - a major correction - so we think we can view these signals as canceling each other out. We wanted to start using the new tool in this way when it's completely ready (the thing that is missing is not something that impacts price projections, but we don't want to release the tool before it's completely ready), but the current environment seems too important not to do it.
Consequently, at this time we do suggest short speculative positions in gold, silver and mining stocks.
Since this is the first time ever that we're suggesting being completely out of your long-term investments, we think additional comments are necessary.
We're not getting out of the precious metals market because we got scared. We are not selling our gold and silver because we think this market has no future. We are not selling precious metals because we think that the bull market is over.
We are selling because we realize that even the greatest of bull markets can at times decline significantly with no particular logical reason. We know that something like that happened over 30 years ago during the previous bull market when the price of gold dropped by almost half before it moved to the high which was multiple times the previous one.
Finally, we are not thinking that the fundamental situation is now less favorable for precious metals than it was in the previous months. With QEs being launched almost regularly now, it doesn't take a lot of analysis to figure out that the precious metals sector almost has to move higher eventually. The key point here is that the current decline - no matter how bad it might appear - is in all likelihood not the end of the current secular bull market in precious metals.
We simply don't want to participate in a significant decline that seems very likely based on technical grounds. What's wrong with waiting it all out? Nothing, you can choose to do so, however, in our opinion it's just like choosing not to participate in a big rally that seems likely. Only it's the other way around. The decline gives us the opportunity to exit at the current prices and get back in even lower. The amount of cash that you get today will get you more ounces later on which will be worth much more when prices surpass the 2011 high.
To clarify:
- Investment capital - no position.
- Speculative capital - short position in gold, silver and mining stocks (half).
- Do not sell gold/silver that you view as your insurance capital. You will find details in our Gold Portfolio report, but in short it means that you should leave some of the physical precious metals holdings intact "just in case".
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
