The gold-to-bonds ratio continues to decline but it hasn't reached the support level yet. If yesterday's move is repeated, it will get to the support level, though.
Gold priced in the euro moved below the first Fibonacci retracement level. The move is not confirmed, but it still has somewhat bearish implications.
The Dow-to-gold ratio temporarily moved to our target of 12.50, but closed at 12.18 - we could see another move to this level when the true bottom in gold forms. This chart, however, suggests that the bottom may already be in.
Gold is making headlines again, which quite often signals a turning point. This time the title says: "Gold is Unsafe at Any Price". The reasoning behind the bearish outlook is very weak in our view. The arguments include "there's no inflation", "gold has no utility", and "people are selling GLD ETF shares and the fund sells gold, which exacerbates the declines".
We already wrote about the inflation and why it's probably not moving higher (yet) - "Gold Corrected on Weeks of Misconception". The no-utility argument is not really an argument for any price move (plus nothing changed in this aspect for hundreds of years). The existence of multiple vehicles to own gold (that make it easier to buy and sell gold) is simply something that makes the moves greater in both directions and makes the moves more volatile - it's not bearish by itself.
The conviction that gold is unsafe at any price is extremely bearish but without a good reason. In our opinion this is a contrarian sign of the coming bottom.
The XAU Index moved below 84 level yesterday, so we suggest moving back in the market with half of one's mining stock investments. "There's blood on the streets" and buying now is not buying close to a top, but close to a bottom. Please recall that we suggested getting out of the mining stocks with half of your capital on April 4th when the HUI closed at 330.7 and the XAU closed at 126.51 (that's a bit more than 50% higher than the price at which you just got back in).
As far as remaining suggestions from our yesterday's Market Alert are concerned, there are no changes.
If gold and silver get to $1,175 and $17.60, we suggest closing the speculative short position, as a bounce will be likely if we move that low that soon. We will plan to re-open the short positions soon afterwards. The most aggressive traders could even open a small long position in the precious metals sector if gold and silver move to $1,175 and $17.60 rapidly. In general, this means that if metals decline once more by as much as they have declined so far today, we’ll likely see at least a local bottom.
Unfortunately, the situation is too unclear for us to set a target for mining stocks, so it seems that closing the speculative short position in miners along with the one with gold (when gold moves to $1,175) is a good idea.
Actually, it seems that gold and silver could move to $1,160 and $17.30, but placing orders a bit higher seems prudent.
Please note that we will also suggest moving back to the long side of the market with half of one's long-term silver investments if silver moves to $17.80. We will send a separate confirmation to get fully back in.
For now 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, platinum, and mining stocks).
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 their link with the USD Index is currently the key thing to monitor. The USD Index is likely to pause or top after 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.
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.
Thank you.
Sincerely,
Przemyslaw Radomski, CFA
