The price action in the precious metals sector was extremely odd on Friday. We had a significant daily rally in gold, small rally in silver and a small decline (!) in mining stocks.
From the euro perspective, gold bounced after moving to the declining support line that we had featured in the latest Premium Update and the same can be said about the average non-USD performance (gold:UDN ratio). The volume that accompanied GLD's rally was significant, which confirms the bullish signal.
The new self-similarity-based tool re-calculates the position each day and after including Friday's rally in calculations it changed its downside target to $1,510 in case of gold. Still bearish but less bearish than before Friday's rally.
Based on the long-term buy signal from the SP Gold Bottom Indicator, we can expect a move higher in the sector in the next 1.5 week, then see a consolidation for about 3 weeks and then a major rally in the following month. The above is based on the average performance of the market after such signals were seen in the past and you can examine it here. At this time, however, the precious metals market is particularly oversold, so the rallies could be even more significant and the consolidation could be shorter.
Gold seems to be following this signal, but the rest of the precious metals market does not.
The HUI Index confirmed it's breakdown on Friday by closing for the third consecutive trading day below the rising long-term support line and the key Fibonacci retracement level. The technical situation for the mining stocks is now bearish. However, we have just seen the a long-term buy signal. We have seen strength in gold. Additionally, it might be the case that a breakdown below such an important support line should be confirmed by 3 weekly closes, not only daily ones, or by a more significant move below it.
Consequently, at this time we think that staying with positions outlined in the latest Premium Update is appropriate.
This means the following:
- Half of the speculative long position in gold, silver and mining stocks
- Full long-term investment position in gold and silver and half of it in case of mining stocks.
Also, we were asked if we still prefer platinum over gold for long-term investments. The answer is yes. If the stock market declines here, then the ratio could decline as well, but if stocks break out, then the ratio will likely rally. Regardless of whether it will happen or not, platinum being cheaper than gold is a long-term anomaly (taking the previous 20 years into account), and we think it's a matter of time before it becomes much more expensive once again.
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 April, 2013 and we will send additional Market Alerts whenever appropriate.
Thank you.
Sincerely,
Przemyslaw Radomski, CFA
