Gold declined once again on Friday and the decline materialized on relatively high volume, which suggests that this is the true direction in which the market is currently moving. The head and shoulders pattern was confirmed as the price moved visibly below it (the decline was significant enough for us to view the pattern as verified even without waiting for the third consecutive trading day with a closing price below the neck level of the pattern). More importantly, gold closed below the 38.2% Fibonacci retracement level based on the entire bull market. A move taking gold close to $1,100 is quite likely underway.
From both the euro and British pound perspectives, gold moved and closed the week below the 38.2% Fibonacci retracement level based on the entire bull market, which is a bearish piece of information. Moreover, from these perspective gold is about to move below its previous 2012 lows.
From the Australian dollar perspective, gold completed the head-and-shoulders pattern in terms of daily closing prices. The formation was not completed in intraday terms, but still, the situation deteriorated based on Friday's price action.
Silver closed the week below its 2008 high and, at the same time, below the 61.8% Fibonacci retracement level based on the entire bull market. In Friday's Premium Update we emphasized that this support is very important, so a move and a weekly close below it are significant and bearish events. Actually, earlier this year - in June - it was the breakdown below this level that was immediately followed by a sharp $2+ decline.
The SLV stopped at the rising short-term support line created by the July and August lows, but the move below the long-term support line is much more significant in our view.
The HUI:gold ratio declined once again and the breakdown below the previous 2013 lows was just confirmed - yet another bearish sign.
The HUI Index itself hasn't moved below its 2013 lows in terms of daily closing prices yet, but it has in terms of weekly closing prices, which is also a bearish indication.
The situation in the stock market has clearly improved, just like we wrote in our latest update and as Paul Rejczak had indicated before the upswing took place.
The USD Index didn't do much on Friday, which makes the decline in the precious metals and mining stocks even more significant. They declined without the dollar's help, so if the USD Index does indeed rally - which is more likely than not based on the long-term breakout that took place months ago - the metals' decline is likely to accelerate.
Let's re-emphasize the True Seasonal patterns and their implications. We covered them briefly in the Oct. 1 Market Alert by writing the following:
"Gold usually declines in the first days of October (as USD strengthens), then moves back up and even rallies 1% above the Oct 1 price (close to Oct 10). Then it declines for about 2 weeks."
The above was not a perfect prediction - gold formed its local high on Oct. 8, instead of Oct. 10 and it corrected by over 2% instead of 1%, but overall, the pattern played out more or less as the True Seasonals had suggested. There was a relatively small rally in early October and then a decline followed. On Oct. 14, we have gold below the price at which it started the month - again in tune with the True Seasonal pattern. What's next based on these patterns? Further declines. This is in tune with what we wrote above, and we can view it as another confirmation.
We wrote one more thing about the True Seasonal patterns (regarding mining stocks), and as you can see, it also was quite close to the factual price moves:
"The performance of gold stocks is even more interesting. They usually decline about 3% in the first few days of October, then move back to where they were at the beginning of the month around the 10-th day of the month and then decline heavily (6% on average). Overall miners tend to underperform metals - confirming the bearish outlook."
All in all, we think that the medium-term trend remains down and that small short positions are justified. Another correction on small volume could provide us with the opportunity to increase the size of the short positions.
To summarize:
Trading – PR: Short position (half of the regular size of the position) in gold, silver and mining stocks.
Long-term investments: A half position in gold, silver, platinum and mining stocks. As far as long-term mining stock selection is concerned, we suggest using our tools before making purchases: the Golden StockPicker and the Silver StockPicker
As always, we'll keep you - our subscribers - 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 October, 2013 and we will send additional Market Alerts whenever appropriate.
As a reminder, Market Alerts are posted before or on each trading day (we usually post them before the opening bell, but we don't promise doing that each day). If there's anything urgent, we will send you an additional small alert before posting the main one.
Thank you.
Sincerely,
Przemyslaw Radomski, CFA
