Let's start today's message with a reply to an interesting question.
Q: I think that the length of time for this pm downturn has become more of a consideration than the percentage decline. In 2008, the decline in gold lasted less than 8 month's. At present, we are 3 months shy of a 2-year bear market. Technically, the overhang is becoming more of an obstacle to an extended rally, and could confine gold price to a trading range for at least a couple of years.
A: The time factor still makes the current decline quite similar to the 1975 - 1976 decline. In our opinion, the 2008 plunge was an anomaly - it "shouldn't" have happened based on the emotionality of the market alone - hedge funds dried up and were forced to liquidate positions - the decline back then didn't really represent declining interest in the precious metals market - it was not a "true decline".
Having taken another look at the chart made us realize something. We previously commented on the link between 1976 and today and it's similarity, but we only looked at the final top as a starting point.
What if the late 1974 / early 1975 high was not the real high. What if the real high back then was in early 1974 and the Dec 1974 / Jan 1975 top was just a failed attempt to break out above the previous top? This means two tops back then - there's similarity with 2011 and 2012 tops in gold. This also means that a longer consolidation than what we have today was seen and that even such a long decline was followed by a sharp rally.
Moreover, the range between the lower of the tops and the breakdown line was approximately the same as the range between the breakdown line and the final bottom. Approximately: 133/180 and 100/133. Applying this to the current situation gives us approximately 1530/1800 1300/1530. This implies that we are very close to the bottom or might have already reached it.
Did we? Back in 1976 the final bottom didn't form right after the plunge (the one that was preceded by about 6 months of consolidation) - it was followed by a pause and another sharp decline that took gold slightly below the previous bottom. This is something that we expect to see this time as well and something that will likely be confirmed by significant underperformance of silver.
Naturally, the history doesn't repeat, but it rhymes, so details could be different this time, but it does seem to me that the 1976 - today link remains quite strong.
Moving to the daily price moves, it seems that the last 3 trading days have largely canceled each other out and markets are where they were previously (HUI Index is once again below the April low). On one hand, we have bearish indications based on weekly closing prices below support levels, but on the other, we have this week's daily rallies on strong volume. Overall, the short-term trend remains down.
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 for the current short positions are:
- Gold: $1,505
- Silver: $25.30
- GDX ETF: $32.2
- HUI Index: 305
We currently think that gold will temporarily move below $1,285, but pull back soon and close the week around this level. How low gold will temporarily go is unclear - perhaps it will form an intra-day bottom close to $1,200 or even $1,100.
Here's the up-to-date version of our trading/investment plan:
- When gold moves to $1,305 close the speculative short position in gold and get back in the market with half of your long-term gold and platinum investments.
- When silver moves to $18.20 close the speculative short position and in silver get back in the market with half of your long-term silver investments.
- When the XAU Index moves to 84, close the speculative short position in mining stocks and get back in the market with half of your long-term mining stock investments.
We will send a separate confirmation to get fully back in.
As far as trading capital is concerned we currently think that placing distant bids is appropriate. They may not get filled, but if we place them too high, we risk being thrown out of the market via stop-loss orders or margin calls if the volatility gets too high (and it's unpredictable how volatile the markets will get as gold is in a reverse parabola right now). If they don't get filled, we plan to get long after gold pulls back significantly on an intra-day basis on huge volume (thus creating a bullish candlestick - probably a "hammer candlestick").
The distant buy price levels are:
- Gold: $1,120 (stop-loss: $970)
- Silver: $16.20 (stop-loss: $14.4)
- $HUI: 155 (stop-loss: 137)
As we wrote, these levels are distant and probably will not be reached, but if they are, they will present a great buying opportunity and also a one that will likely disappear almost immediately - that's why we we think that placing orders in advance is appropriate.
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 June, 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
