We believe it will be a good time to open a speculative long position in gold later today - say 15 minutes before markets close. However, we suggest opening the long position ONLY if gold at that time will be above $1,577 and only if at the same time S&P will be above 1315. If gold is below this price level 15 minutes before the end of today's market session, OR S&P is below 1315, we suggest staying out of the precious metals market with one's speculative capital.
Our short-term target for the rally is $1,620 for spot gold ($158 for GLD). In this case, stop-loss orders will be $1570 and $152.5, respectively.
If gold stays above $1,577 today, it will be the third day after gold moved back above the important declining support/resistance line. The implication is that the previous breakdown would be invalidated. If that happened, the risk of a severe plunge in the precious metals market (like the 2008 one) would be much lower (it will no longer be the probable scenario). The invalidation of the previous breakdown will by itself be a bullish factor for gold and the rest of the sector, which will likely generate at least a short-term rally. That's what we would prefer to bet on.
Additionally, if S&P stays above 1315, it will invalidate the breakdown below the long-term support line. This is also a bullish factor for the whole precious metals market.
The situation in the USD Index is still bullish from the medium-term perspective, however, on the short-term basis, the dollar's correction is still quite small i.e. it could easily move lower in the following days even if it is to rally in the following weeks.
The situation in the USD Index is one of the things that make us provide a target that is not too far from where gold is today. The case for gold is more bullish in the short term (up to 2 weeks in this case) than in the medium term (2 weeks - 6 months in this case). Other factors that are in play right now and that suggest caution for the medium term are:
- Breakdown and completion of the head-and-shoulders formation in the TSX Venture Index,
- Breakdown in the silver:gold ratio,
- Breakdown in the gold:bonds ratio.
While the above breakdowns are important in the medium term, we believe the price action in gold is much more important in the short term and that a quick move up is in the cards. What then? It will depend on the situation in the above-mentioned markets and we really can't tell at this point. The long-term fundamentals are in place, the short-term bounce is likely, but the medium term is unclear.
Summing up, we suggest preparing for opening a speculative long position in gold (the situation is less clear in silver and miners) today, if gold is above $1,577 AND S&P 500 is above 1315 before the end of the session. We will not send a confirmation message later today, because if we started writing/sending it several minutes before the markets close, the odds are that the markets would already be closed before you could act on it - that's why we're sending this message in advance. This is a bit complicated, so once again:
- Gold above $1,577 AND S&P above 1315 before the end of the session => open speculative position in gold
- Gold above $1,577 AND S&P below 1315 before the end of the session -> no speculative position
- Gold below $1,577 AND S&P above 1315 before the end of the session -> no speculative position
- Gold below $1,577 AND S&P below 1315 before the end of the session -> no speculative position
At this point we suggest keeping your long-term investments intact, because the medium-term situation is not bearish enough to justify selling/hedging them. This could change and we will keep you informed. We are keeping our eyes open for both: bullish and bearish signs (for instance those that that could make the 2008-like plunge more likely).
Thank you.
Przemyslaw Radomski
