Generally, the comments that we made in last week's Premium Update and the following Market Alert are up-to-date today.
From both the USD and non-USD perspective gold has corrected 50% (or slightly more) of it's April decline and moved lower on Friday once again. The GDX:GLD ratio moved back down on Friday, basically canceling the previous sharp upswing. Other charts/ratios that we cover remain largely unchanged as well.
On Friday we wrote the following:
There is one more important resistance level that was just reached in case of gold. On the long-term gold chart that we've been featuring in our updates, you can see two rising red support lines. Actually, only the lower one is still support - the upper one (based on weekly closing prices) is resistance and it is the latter that was hit yesterday. Assuming that long-term trendlines based on weekly closing prices are important (they are in our view), we can view the current move higher so far as a verification of the breakdown below this level. A continuation of the rally would mean a come-back, but for now we don't see it.
We had seen a temporary move above this important line, but gold declined on Friday and closed more or less at it - without a real breakout.
We have been asked to comment on the support provided by the 300-week exponential moving average in gold - it provided support in early 2011, so the question is if this level is critical this time as well. Our take is that this particular line (300-week exponential moving average) is not that important. Yes, it showed support in early 2011, but if you take into account the whole bull market, it was effective less than 50% of the time. Generally, in terms of effectiveness, we have found that simple moving averages tend to work better than exponential ones - at least in case of the precious metals market.
We have also been asked what could happen to silver if gold moved to $1,100. In our opinion, if gold moved to $1,000, we could see silver at $14.50 or so - at the rising support line created by connecting the 2003 and 2008 bottoms. If gold moved to $900, we could see silver below $10, close to its 2008 bottom levels. At this time, however, it seems that silver will bottom at $18.
Finally, we have been asked if we could see at least a yearly rally in the USD Index if it continued to show strength. The answer is yes, this could take place, however, we doubt that the declines in the precious metals sector would take that long. Please note that the USD Index is ultimately an index of paper currencies and gold can rally in all of them at the same time (which has been the case since approximately 2006). For instance, gold and the USD Index rallied together in the first half of 2010. The very long-term correlation coefficient between gold and the USD Index equals -0.1, which means that in the very long term, gold has moved rather independently of the USD Index (at least taking the previous 6 years into account).
Summing up, at this moment we suggest neither an open speculative nor an open investment position in gold, silver and mining stocks. If we get a confirmation (for example in the form of a move higher on tiny volume or a breakdown below previous lows in silver and mining stocks) that the next downswing is beginning, we will suggest re-opening short positions, and if the above-mentioned patterns are broken, we will suggest getting back on the long side of the market.
Here's the up-to-date version of our trading/investment plan:
- When gold moves to $1,305 open a long position in gold (with $1,268 as a stop-loss level).
- When silver moves to $18.20 open a long position in silver (with $17.65 as a stop-loss level).
- When the XAU Index moves to 84, open a long position in the mining stocks (with 80 in the XAU Index as a stop-loss level).
The above are also the levels at which we suggest getting back on the long side of the precious metals market with half of your long-term investments. We will send a separate confirmation to get fully back in.
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 May, 2013 and we will send additional Market Alerts whenever appropriate. We have prolonged the time in which you - our subscribers - will receive Market Alerts daily for another full month.
Thank you.
Sincerely,
Przemyslaw Radomski, CFA
