Just a quick message to keep you up-to-date. We've summarized our latest Premium Update in the following way:
"In the precious metals sector, an insignificant short-term rally is also likely to be followed by declining price levels. It is possible that gold and silver mining stocks will verify breakdowns below the neck level of the head-and-shoulders formation, which would very likely lead to lower prices for the mining stocks and for gold and silver as well."
On Friday and in the early-Monday trading we've seen price action that was in tune with the above. Gold rallied visibly higher, but silver and mining stocks have barely moved - definitely not confirming gold's strength. From the non-USD perspective, gold moved a bit (0.79%) higher, but it was not enough to move above the rising resistance line, so the situation is exactly the same as it was when markets closed on Thursday. Namely, at the same time we are seeing a breakout above new highs and a breakdown below short-term support line (just like we described in the latest Premium Update) and the situation here remains mixed.
Moving back to gold, the interesting thing here is the significant volume that accompanied Friday's rally. Generally, this is not something that we we're expecting to see as a signal of the end of this rally. In fact, if we analyzed gold on a stand-alone basis, we would currently suggest a short-term bet on higher gold prices. However, that is not the case as we live in a globalized world with integrated capital markets and we realize that no market (including gold) moves totally independent from other markets. The point is that the analysis of the vast majority of other markets suggests that going long gold here is particularly risky as when it reverses, it could decline very quickly - in an early-May fashion. Consequently, we don't suggest any speculative position in gold at this moment.
Based on Friday's big volume, it seems that perhaps gold could reach its previous high (about $30 higher from here) before the top is formed. If gold keeps rising at its current pace of growth, it will reach its previous highs at the end of this week or early in the following week. This would be in tune with the cyclical tendencies present on the Euro Index and silver markets, which makes a top likely to take place at that time.
Meanwhile, the stock market didn't do much and thus the situation has become slightly more bearish, as it means that the breakdown is closer to being verified. We can state the same about the financial sector, with the same implication. Euro Index moved slightly higher after touching the declining support lines and the situation resolves as described a few days ago - we're witnessing a small rally, which at this point appears to be nothing more than a counter-trend one.
Summing up, the main points made in the latest Premium Update are up-to-date. The only adjustment at this point is the increased likelihood of gold moving higher in the next few days (which we don't view as worth betting on). If at the same time silver and mining stocks continue to lag gold to as big extent as they have been lagging recently, we will most likely send a "go short alert" soon.
We will be watching the markets closely and report to you should anything change.
There's one more thing that we would like to share with you today. Here's what the forex.com website sent out to their mailing list:
"From: FOREX.com Date: Fri, Jun 17, 2011 at 6:11 PM Subject: Important Account Notice Re: Metals Trading
We wanted to make you aware of some upcoming changes to FOREX.com’s product offering. As a result of the Dodd-Frank Act enacted by US Congress, a new regulation prohibiting US residents from trading over the counter precious metals, including gold and silver, will go into effect on Friday, July 15, 2011.
In conjunction with this new regulation, FOREX.com must discontinue metals trading for US residents on Friday, July 15, 2011 at the close of trading at 5pm ET. As a result, all open metals positions must be closed by July 15, 2011 at 5pm ET.
We encourage you to wind down your trading activity in these products over the next month in anticipation of the new rule, as any open XAU or XAG positions that remain open prior to July 15, 2011 at approximately 5:00 pm ET will be automatically liquidated.
We sincerely regret any inconvenience complying with the new U.S. regulation may cause you. Should you have any questions, please feel free to contact our customer service team.
Sincerely, The Team at FOREX.com"
More information:
http://assetprotectionsecured.com/dodd-frank-bill-outlaws-sale-of-gold-silver/
http://blogs.marketwatch.com/thetell/2011/06/20/dodd-frank-rules-outlaw-retail-gold-silver-trading/
This means that if FOREX.com's interpretation of the Dodd-Frank Act is correct, then there will be a downward pressure on the prices of gold and silver as some people will be forced to liquidate their speculative long positions (and historically, individual investors are long on average). The court's interpretation is not yet known, of course, so FOREX.com may be getting ahead of itself here. As for other similar places where one can trade precious metals are concerned, the following provision provides more optimistic view: "results in actual delivery within 28 days or such other longer period as the Commission may determine by rule or regulation based upon the typical commercial practice in cash or spot markets for the commodity involved." In other words, spot trading should theoretically not be affected.
Summing up, given on the above, the decline in prices of precious metals in the following months appears even more probable. If you receive correspondence regarding the Dodd-Frank Act from your brokerage (or from other entities that allow you to trade precious metals), we would appreciate if you forwarded it to us.
On an administrative note, we will not provide a Premium Update this Friday, but instead we will provide a few (at least 3, including this one) short messages this week to make sure you are kept informed. We apologize for any inconvenience. Thank you for using the Premium Service.
Sincerely,
Przemyslaw Radomski
