Gold, silver and mining stocks declined heavily yesterday, which fortunately didn't catch you by surprise as we emphasized over and over again that this was the likely outcome. GLD, SLV and GDX declined by 2.3%, 3.6%, and 4.6%, respectively. Silver's and miners' outperformance, as seen on Friday, turned out to be a temporary phenomenon, which didn't catch you by surprise either. Speaking of underperformance, SLV and GDX are very close to their April low (SLV is below them) while GLD is visibly above its April low. It seems that the decision about using silver and miners as a proxy for the sector for shorting purposes was correct.
What's next? There are no changes in our outlook on the precious metals market. We continue to think that the decline is not over, but that it will soon be, just as the long-term cyclical turning points for gold suggest and as the seasonal tendencies confirm.
Does yesterday's price-volume action signal anything by itself? We think so. We have previously mentioned the very weak self-similarity between what happened right before the big April plunge in metals and what is going on in the market right now. Yesterday's session is still in tune with the previous decline's beginning. We saw temporary strength in silver and miners and it was followed by declines in the entire precious metals sector, at first at low volume and then on bigger volume.
When we first mentioned the signals from our soon-to-be-released self-similarity-based tool, we received a question - how much do we trust this tool. At this time we think it's safe to say "a lot." Take a look at how this tool dealt with the most recent decline in gold, the subsequent pullback and then the current move lower.
The tool didn't catch each and every move. It wasn't flawless. It was realistically great and very useful, which is even better. It didn't catch each top and bottom but it was quick to "change its mind" when something was going on and it adjusted instantly (a human analyst might want to "stick" to their original forecast for longer than they should because they simply don't want to admit before themselves that they haven't gotten something right). The tool is not based on support or resistance lines, but it still detected that when the breakdown happened in early April, it was no small event and changed the suggestion to "sell". It didn't detect the final bottom, but it "changed its mind" after some strength was seen and moved to the bullish camp. It stayed there until late April when the rally ran out of steam and issued a sell signal once again. Not perfect, but profitable and very useful. In our opinion, what's best about the tool is that each day it provides the answer to the question "did yesterday's price move invalidate anything" - which is the most popular of the questions that we receive on a continuous basis. The second most common question is: "Where do you think the market will move next?" The tool provides the best-guess price path each day. Automatically, without any emotional biases.
It's no crystal ball - we don't create such - it's several sophisticated algorithms working together to estimate if what we're seeing now is a repeat of what we've already seen before. The tool checks not only price similarity, but also the similarity of volume levels. On a side note, that's why the price projections are for the GLD ETF and not for spot gold.
Yes, we did write that the tool provides price paths. Here's what we saw based on May 14th closing prices (it's up-to-date):
Just a few days ago the tool suggested that gold will move exactly to its April low. Right now, it suggests a small move below it. Again, the projections and signals are updated on a daily basis, so the situation might change as we move forward. The point here is that the tool confirms what we have estimated based on other techniques, so we are more confident in our projections.
We have been asked to comment on the bearish indications from put-call ratios for the GDX, SLV and GLD - whether or not the extreme pessimism that they suggest is or isn't a contrarian sign to go long precious metals and mining stocks. While we agree that it's usually a good time to bet on the opposite to what the vast majority is doing, the question is if in case of the precious metals market, the put-call ratios are indeed the proper proxy for investor sentiment. We think that this ratio shows what more sophisticated investors and traders are doing, not necessarily what the majority does. Therefore, it seems doubtful whether we should use it. To find out more, we have launched a survey on our Facebook page (which, to our knowledge, is the biggest precious-metals-related page on Facebook having over 50,000 followers). It's been around for only a day, but we already have some interesting results.
We asked the same questions that we did about a month ago - "where will the gold price be in 2 weeks". Out of 32 participants (again, less than 24 hours of data), 12 said that gold will rally, 16 said that gold will decline and 4 said that it will remain at the current levels. Therefore, even after this week's decline, gold investors are not extremely bearish - at least not yet. Therefore, gold could decline further.
Also, we checked the stats of the survey before the decline materialized yesterday and at that time we had equal amount of votes (6 for each) for the bullish and bearish outlook. This could be a coincidence as there were just several voters, but it could be a small indication that investors became more bearish when price declined (something that we would expect to see). This means that the survey likely provides us with a good way to measure sentiment and at the same time it suggests that the latter is not bad enough to indicate a bottom.
Our Facebook survey tells what people interested in gold are thinking. But what do other investors think? Fortunately, soon after we created our survey, finance.yahoo.com launched a similar one. Here's the question and the results:
Only 25% investors think that gold will move higher. That is low, but not yet extremely low. What does it tell us? That gold can definitely move much higher in the long term.
Overall, the trend lower seems to continue. If the USD Index moves above its 2012 high, verifies the breakout, and metals respond with a decline, we may suggest increasing the size of the short positions.
For now, we think that opening a short position in gold (in addition to the already-opened short positions in silver and mining stocks) is a good idea.
Summing up, we believe that betting on lower values of gold, silver and mining stocks is justified from the risk/reward point of view. In other words, we suggest having speculative short positions in gold, 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.
Naturally, we will provide a more detailed analysis in tomorrow's Premium Update.
Thank you.
Sincerely,
Przemyslaw Radomski, CFA
