Yesterday, the USD Index moved slightly higher, then declined and finally ended the session a bit lower than on the previous day. It was interesting to see gold's reaction to these intra-day price swings. When the USD Index moved higher - by 0.30 or so, gold declined by about $25. Then the USD declined by about 0.4. Normally, we would expect to see gold to erase the previous decline and move even higher, just as the USD erased its small rally and declined below the initial level. But that's not what happened. Gold pulled back, then lost strength and ended $16.50 lower. Gold didn't even manage to pull back half of the decline. The extreme underperformance relative to the USD Index clearly remains in place and the implications remain bearish.
Gold confirmed the breakdown below the rising long-term support line by closing below it for third consecutive trading day. The breakdown of this importance will be more clearly confirmed by at least another weekly close below this line, but it's safe to say that the breakdown was at least somewhat confirmed and the technical outlook deteriorated further yesterday based on that.
Please note that mining stocks continue to underperform gold.
Since gold and silver closed yesterday more or less where they were when we posted yesterday's extra update, the comments that we made yesterday, including price targets are up-to-date also today.
Summing up, we suggest keeping speculative short positions in gold, silver and mining stocks and being out of the precious metals market with most of one's long-term capital (exception: half of the position in gold and platinum).
The stop-loss levels for the current short positions are:
- Gold: $1,383
- Silver: $22.55
- GDX: $28.20
- HUI Index: 262
We currently think that the precious metals sector will move even lower and we think that its link with the USD Index is currently the key thing to monitor. The USD Index is likely to pause or top when moving to 86.4 or so and the rally taking the dollar that high could trigger a powerful decline in metals and miners. Gold could very well decline to $1,100, silver to $14.70 and the HUI Index could decline to 150. They don't have to move that low, but these targets are not out of the question.
Here's the up-to-date version of our trading/investment plan:
- When silver moves to $18.20 get back in the market with half of your long-term silver investments.
- When the XAU Index moves to 84, 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 as any potential moves down may be very volatile and prices may not stay there for long (perhaps only for several minutes). At the same time it seems to be a good idea to close the remaining short positions when gold, silver and mining stocks reach the levels featured below.
The distant buy price levels are:
- Gold: $1,120 (stop-loss: $970)
- Silver: $15.20 (stop-loss: $14.20)
- $HUI: 155 (stop-loss: 137)
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 July, 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.
We received a few questions that we would like to share with you, along with our replies:
Q: First, congratulations - the last couple of months has been like watching the movie of the book you've already read. You really nailed it
My question is this: I am one of your few subscribers who can only trade long term miners at the close of market. Sounds like the trip to 1100, if we get there, will be a fast one. Are you thinking we might spend at least a day or two $70 to 100 lower (gold) than we are now, so I can get back in? Or should I start moving back in now (like with LT physical)?
A: Thank you. In our opinion, our general suggestions apply also in this case (it's not an investment advice, though). Buying half with XAU at 84 (which is quite close - if miners repeat yesterday's decline, we'll get there) and waiting with the other half of capital dedicated to long-term mining stock investments for lower prices seems to be a good idea. It seems to us that there is at least 70% chance of having miners much lower for at least 2 days and at the same time it seems that there's at least 80% chance of buying miners at better prices than in case of the first half of the capital. If the price moves much higher quickly after the bottom, then it's still quite likely that it will not move back to previous years' highs overnight, but that you will still have the opportunity to get back in at a relatively good price.
Q: Gold trading below production costs will drive supply down and push prices higher. High demand for physical metals is a bullish factor.
We agree. At the same time, however, we think that gold will move lower - in the short term. The key question here is timing. Gold will very likely react to these positive fundamental factors, but it may happen months from now. Markets are not logical in the short run but emotional. Was silver's fundamental picture very good in July 2008 but became awful in October 2008? No, there were no changes in it, and yet price of silver was approximately slashed in half during that time.
All in all, we agree that gold should move higher and the same is the case for the rest of the precious metals sector, but we don't think it's likely to happen right away.
Q: Could you explain shorting gold. Can one buy Dust or SSLV? How do they work? Are they stocks you buy? (Sounds like a stupid question). It would be great if you could answer this as I simply don't know how to short gold/silver and hate options and futures.
A: Generally, yes, if you don't like derivatives like options and futures, using ETFs or ETNs should prove useful. In short, you buy them (for instance DUST) just like stocks and you can lose only what you invest in this case. Please note that we have an ETF / ETN Ranking that you can use - there's a column that allows you to see the funds useful for shorting (tip: clicking the "Short" column title twice will bring the bearish ETFs/ETNs to the top of the list).
Thank you.
Sincerely,
Przemyslaw Radomski, CFA
