The precious metals market corrected today (miners also corrected yesterday) and this situation is quite similar to what we saw at the beginning of the year. It's similar not only because the sector moved lower. It's similar because of what is going on with the dollar.
At the beginning of the year, the USD Index moved to the declining resistance line - breaking it temporarily. The breakdown was then invalidated, which caused gold and silver to soar. The USD Index is once again at this resistance line and metals and miners once again declined. The difference is, however, that the dollar index is now lower and metals are higher. Miners are more or less at the same level.
Are metals likely to rally once again, just like it was the case after Jan 4? Yes - the USD Index will likely decline shortly and take the precious metals market higher. What we wrote about this relationship yesterday is very much up to date:
The USD Index is right at the declining resistance line and it's at its cyclical turning point which is a bearish combination for the currency and a bullish one for the precious metals sector. If the USD Index declines here - and that seems likely - the small head-and-shoulders pattern will likely be completed. This would have bearish implications for the dollar and could make it complete the long-term head-and-shoulders pattern, which would have even more bearish consequences. This likely-to-be-seen snowball effect will - if seen - have very bullish implications for gold, silver, platinum, and mining stocks. We expect the rally to accelerate in the coming weeks.
Miners are not yet moving higher, which in our view reflects the poor sentiment among precious metals investors. Powerful rallies start when the sentiment is low, because these are the times when there is a lot of people that know the market but are not yet in it and are ready to buy as soon as they see the price higher. While this doesn't imply that a rally is likely to be seen, it does, however, suggest that patience should be well rewarded if the next big move in the sector is to the upside - and we believe this is precisely the case.
We remain bullish on the precious metals sector and, just as we indicated previously, half of the long position is suggested for gold and silver and a full long position is suggested for mining stocks.
Please note that the stop-loss level for half of the long position in mining stocks ($43) was not reached today.
Naturally, we suggest remaining in the precious metals market with your long-term investments.
As you recall from yesterday's Market Alert, we have recently expanded the Dictionary section on our website and now it includes related terms and dialogs that can help understand what a given terms means for gold and silver investors. Here are three more terms for you to look at:
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 February, 2013 and we will send additional Market Alerts whenever appropriate. That's right, we decided to keep sending you daily Market Alerts at least until the end of the next month based on the very positive feedback that these daily alerts have generated.
Thank you.
Sincerely,
Przemyslaw Radomski, CFA
