Yesterday was a very bad day at least for those who were previously long precious metals. Happily, you were not among them; you were either out (long-term investments) or short (speculative part of the portfolio) and we have been preparing you for this decline for a few weeks.
To be clear, at this time, if you have been following our suggestions, you are partially back in the market with the long-term gold and platinum holdings (since after almost entire decline that we saw yesterday) but are still speculatively short gold, silver and mining stocks.
Gold declined by more than $70 yesterday breaking below the psychologically important barrier of $1,300. Silver moved below $20. Is this enough? Will they need to decline more before the bottom is really in? Quite likely, yes, and that's why we’re still betting on such decline. From the long-term point of view, we have metals at prices which are already low, so we have decided to move partially back in.
The USD Index moved decisively higher yesterday, but this move by itself wasn't that big. It was important but it's unlikely the end of the dollar's gains. As it moves higher, metals and miners are likely to decline again. If metals refuse to react to the dollar's rally in the following days (for a few days in a row) we'll have an indication that the bottom is in. We are not seeing this now.
The CME has decided to increase margins for gold and platinum. The immediate question that you're probably asking yourself now is "wait, isn't that something that used to lead to declines in the past and that was something that we saw after gold actually rallied substantially?" The answer is yes. In fact, it's the thing that triggered the sell-off when silver moved close to $50 two years ago. Last time the margins were raised was on April 16, 2013, right after the big drop.
Details:
CME Raises Margins for Gold as Prices Fall to Lowest Since 2010
Why did they do it this time? Officially - to lower the volatility, again. Higher margins mean that speculation is less attractive as the leverage decreases. Some might say that it shouldn't make a difference because the futures market is a zero-sum game meaning that for every long there is a short, so the overall effect will be null as well. However, the truth is that the markets need new buyers entering the market in order for the prices to keep rising. Without that, prices fall. Consequently, lower interest in a given market should be bearish for prices.
We have already researched this area thoroughly and we encourage you to read (or just examine the charts if you're short on time) our report on margin requirement changes for gold and silver.
The most important implications are that the impact of a margin hike is indeed bearish for the short term (1 week - 1 month).
Consequently, we have a non-technical reason for which we can expect lower precious metals values shortly. We are already prepared for it, so it doesn't cause any changes in our suggestions for you.
Summing up, we suggest keeping speculative short position in gold, silver and mining stocks and being long with half of one's long-term capital in case of gold and platinum.
The stop-loss levels for the current short positions are:
- Gold: $1,428
- Silver: $23.55
- GDX: $31.3
- HUI Index: 292
We currently think that gold will temporarily move below $1,285, but pull back soon and close that week (the one in which it moves below $1,285) 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 (yes, the current lack of reaction to dollar's weakness might be suggesting a move that low).
Here's the up-to-date version of our trading/investment plan:
- 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 go long after gold has pulled 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 will probably not be reached, but if they do, they will present a great buying opportunity, 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.
Thank you.
Sincerely,
Przemyslaw Radomski, CFA
