In short, the situation remains unchanged from what we described in the latest Market Alert.
Gold is close to key support levels, also when viewed from the European perspective (gold priced in euro). Gold is making headlines and this is something that used to signal extremes. In this case it might be an indication that the bottom is near. However, with this kind of volatility, even if the bottom is seen in a week or two, it could be a few hundred dollars lower.
Here's something that might have gone under everyone's radar - CME decided to increase margins for gold and silver. The immediate question that you're probably asking yourself now is "wait, isn't that something that used to lead to declines in the past and that was something that we saw after gold actually rallied substantially?". The answer is yes. In fact, it's the thing that triggered the sell-off when silver moved close to $50 2 years ago.
Details:
Why did they do it this time? Officially - to lower the volatility. Higher margins mean that speculation is less attractive as the leverage decreases. Some might say that it shouldn't make a difference because the futures market is a zero-sum game meaning that for every long there is a short, so the overall effect will be null as well. However, the truth is that the markets need new buyers entering the market in order for the prices to keep rising. Without that, prices fall. Consequently, lower interest in a given market should be bearish for prices.
We have already researched this area thoroughly and we encourage you to read (or just examine the charts if you're short on time) our report on margin requirement changes for gold and silver.
The most important implications are that the impact of a margin hike is indeed bearish for the short term (1 week - 1 month) and that it used to impact silver more heavily than it was the case with gold.
Consequently, we have a non-technical reason for which we can expect lower precious metals values shortly. We are already prepared for it, so it doesn't cause any changes in our suggestions for you.
On a side note, platinum declined as well but it's holding up better than gold does, so if you had switched part of your holdings from gold to platinum in the previous weeks/months as we've been suggesting, you were not hit as badly by this decline as those who didn't make this switch.
All in all, our suggestions remain as described yesterday. We will quote yesterday's comments and supplement them with stop-loss details:
Here are our suggestions for the current environment.
A) Trading positions. We plan to trade either the comeback or a volatile pullback.
- When gold moves to $1,305 close the short speculative position in gold and open a long one (with $1268 as a stop-loss level).
- When silver moves to $22.1 close the short speculative position in silver and open a long one (with $20.90 as a stop-loss level).
- When mining stocks (HUI Index) are between 260 and 270 and if either of the above conditions (gold at or below $1,305 and/or silver at or below $22.1) are met, close the short position in mining stocks and open a long one (with 244 as a stop-loss level).
If possible, please place orders now (this might not be doable for point number 3, but it should be possible for points number 1 and 2. This is important as we might not be able to send you another alert before the opportunity disappears.
B) Long-term investments. If HUI is above 260 AND gold gets below $1,300, but doesn't decline below $1,280 AND silver moves below $22, but not below $21 - get back into the precious metals market with your long-term capital. In other words, go back long gold, platinum, silver and mining stocks if all the above-mentioned conditions are met. The above should allow you to get back in a bit sooner (before we write and send out another alert) and at lower prices. If these conditions are not met, we will still let you know when we think it's a good idea to get back.
For now, the suggestions remain as described in our earlier Market Alert:
- 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
