In our previous Market Alert we have mentioned that perhaps it will be a good thing (from the risk/reward point of view) to sell one's long-term holdings in the precious metals sector. One of the reasons making us consider this possibility was the weekly close below the 2009 high. Since long-term holdings are usually a large part of one's portfolio the decision to get out of gold and silver is a very important development. Consequently, we have once again gone through each and every chart over the weekend as we've re-examined the situation with the long-term implications in mind, in order to make sure that we haven't missed anything.
Finally, we have decided NOT to issue a long-term sell signal today and to provide you with our reasoning behind this decision.
Firstly, even if this is a beginning of a big slide down, it is still very likely that we will see a pullback because the move down was both big and sharp and GDX ETF (proxy for gold and silver mining stocks) is right at the rising support level with the Stochastic indicator suggesting a bottom. Generally, it might be viewed as a short-term speculative buy, but at this point opening long positions is not recommended for most Speculators. This is precisely because we have yet to determine the direction of the next big move. At this point the odds slightly favor a move down, but the probability is not big enough in our view to sell one's long-term investments. Additionally, if the next big move is down, it means that the short-term post-decline bounce in the next several days would be small and most likely would not cause gold to go above $1,226.
Moreover, at this very moment there are no clear "sell or short stocks" signals. The breakdown below the neck level of the head-and-shoulders formation on the general stock market was not confirmed. In fact, at the moment of writing these words we see the value of both DIA and SPY ETFs (proxies for the general stock market) moving above pattern's neck level.
Another point worth keeping in mind is that we are in a secular bull market in the precious metals, which has much more to go, and consequently, the true risk is being out of the market with one's long-term holdings, not to be in it. This means that we need to have very convincing signals that the market is going lower before we decide to drop long-term gold and silver investments. This is not the case at this point, even though the week closed below the 2009 high.
As mentioned in the previous Premium Updates gold tends to rise for 2-3 weeks through the early days of July (which makes gold rise about 2% during this period). This is what gold did on average in the past 8 years, but please note that it doesn't mean that it will play out exactly (!) in the same way this year. Still, given the rapidness of the recent decline, it is quite likely that we will see a pullback either way, and this likelihood is increased by the seasonal patterns. It will be particularly interesting to see how high and at what volume levels does this pullback take gold. Exceptional weakness during the pullback could signal further declines during the summer months. Should that be the case we will let you know in the Premium Update, or by sending out another Market Alert.
Thank you.
Sincerely,
Przemyslaw Radomski
