Yesterday's decline in gold was quite significant on one hand (biggest decline in 2 weeks), but on the other, it didn't take gold much lower. From the non-USD perspective, however, gold is now once again below its 38.2% retracement level (after having briefly moved above the 50% retracement), which is an indication that the pullback might be over and that gold is ready to decline once again.
Moreover, the decline that we saw yesterday took place on volume that was higher than what we had seen in the previous 2 days when gold moved higher and the implications are bearish as in this case volume confirms the move down, not the move up. Silver erased much of last week's gains yesterday alone, so the bearish signal here is much more profound than what we see in the gold market.
Mining stocks didn't decline much yesterday, but we have noticed an interesting pattern in the recent weeks - that miner's reaction can be delayed by a day or two. In any case, miners (GDX ETF in this case) declined yesterday on volume that was much higher than the volume that had accompanied daily rallies earlier this week. Again, a bearish sign.
The most interesting thing, however, in our view is something related to what we described yesterday. The recent intra-day link between gold and USD. Here's what we wrote:
The USD Index declined in the last several days (if you've been wondering, yes, it's been declining since the last cyclical turning point) which is something supporting higher gold prices. The point is that this effect had smaller effect with each day and it was barely visible yesterday. This is a short-term indication that gold - and the rest of the precious metals sector will be moving lower relatively soon (gold stopped responding to positive factors). It could also be the case that the two markets (metals and USD) are moving independently from each other, but it seems to us that this is still an important clue.
This tendency has continued and yesterday we first saw gold's steady decline along with a decline in the dollar (which was much more negative than what we had seen previously as weaker dollar couldn't even trigger a small rally in gold) and then gold plunged when the dollar bounced back. Overall, the USD Index ended the day just a bit lower whereas gold and silver declined significantly. This continues to be a bearish sign for the short term.
We continue to believe that betting on lower values of silver and mining stocks is justified from the risk/reward point of view. It's probably a good idea in case of gold as well, but we are not that convinced, so we're staying out. In other words, we continue to suggest having speculative short positions in silver and mining stocks.
The stop-loss levels are:
- Silver: $25.30
- GDX ETF: $32.2
- HUI Index: 305
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 close the short position and open a long position in silver (with $17.65 as a stop-loss level).
- When the XAU Index moves to 84, close the short position and open a long position in the mining stocks (with 80 in the XAU Index as a stop-loss level).
The above ($1,305, $18.20 and 84) 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
