Gold started the day by declining and the rest of the precious metals sector followed. Everything that we wrote in yesterday's Market Alert and Friday's Premium Update remains up-to-date.
There is an interesting interview on gold on finance.yahoo.com today.
In the interview, Mr. Swedroe makes that point that the loose monetary policy (which is a polite understatement, in our view, to describe what's going on) may eventually lead to inflation (our take is that it virtually has to happen) and if Fed tightens the monetary policy, gold will plunge. We doubt that it will happen anytime soon. Even if it does, please keep in mind that over 30 years ago gold rallied for months after Paul Volcker raised rates substantially.
Gold may not be a hedge in the short-term, or medium-term or even long-term in some cases - but in very long term it preserves the real value. Mr. Swedroe says that he favors short-term treasuries and long-term inflation-protected bonds over gold as he thinks they are much better hedge than gold is. We can agree only to the point that they can work better temporarily. Gold has thousands of years of history as money and US treasuries are not even close to matching that kind of record. Sure, in the last several decades gold's price fluctuated wildly, but was it ever worthless? No. It always rebounded eventually. Paper currencies? State treasury notes? There were cases when they became worthless in the modern history. Plus, let's keep in mind that inflation-protected securities are protected according to the official inflation rate. If the latter is understated (and it likely is), then these securities will provide protection only to some degree.
Please note that at 1:38 Mr. Swedroe says that if the Fed doesn't tighten the monetary policy, gold could go to $2,500 or $5,000. So, basically, even though gold's outlook presented in the interview is bearish, if just one of the things mentioned is different that Mr. Swedroe says and the Fed doesn't tighten the monetary policy, we get a very bullish outlook.
In our opinion, the current move lower doesn't mark the end of the bull market, but is a significant correction.
Summing up, 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
