In Friday's Market Alert we wrote that we didn't really believe in precious metals' breakout as it was not confirmed by significant volume in the GLD and SLV and because metals' performance relative to USD Index was weak. Gold and silver declined in the following hours and the breakout in gold was indeed invalidated.
We can see the invalidation in both: spot gold (move below $1,400) and the GLD ETF (move below $135). The situation is more complicated than that because if we take into account the resistance/support line created based on daily closing prices (instead of intraday highs), we didn't have the invalidation of the breakout. We have the same situation in case of silver. Breakout in mining stocks was not invalidated in either case.
All in all, it's unclear whether we had a breakout or an invalidation thereof. The implications are currently neither bullish, nor bearish in our view.
Since the USD Index is now back in the game (meaning that it's once again an important factor to consider for the short-term price moves), let's compare the Friday's price swings. Initially, the USD moved to 83.65 but then it declined, finishing at 83.30 (only 0.26 - 0.32% higher). At the same time gold declined to $1,384 initially and finally closed at $1,388 (declining $24.40 - 1.73%). This is an intra-day confirmation of what we were emphasizing previously - that gold is responding strongly to the dollar's rallies but responds less significantly to its declines. This is a bearish situation as it means that gold would likely decline even if the USD was just trading sideways - and the USD is after a confirmed, long-term breakout, which makes the situation worse for gold.
The USD-silver link is alike. The USD-miners link is different as miners have not been underperforming in the recent days.
Basically, it seems that whatever short-term bullish indication we have it's based on the miner's strong performance in recent days. As you may recall, we decided to be careful (or doubtful) with viewing this as a true bullish indication. Yes, a move in a given direction in the miners used to be a good indication of where things were going years ago, but that was not the case in the recent weeks and months. In fact, miners' strong performance used to signal the end of the consolidation and was a first step to further declines. Consequently, the question is if this strong performance is within "bearish norms" that we can see during a decline, or is it something exceptional, perhaps indicating a change in the regime (meaning that miners' strong performance would once again start indicating higher gold prices).
Let's take a look at the 2008 decline in the HUI and in the HUI:GOLD ratio. Beginning with the latter, there were a few cases when the ratio rallied within the decline and two of them seem particularly interesting: August 2008 and September 2008 ones. They are interesting because the ratio moved very close to its 50-day moving average and this is what we saw right now as well. Consequently, in case of the ratio alone - last week's move higher is within "bearish norms".
In September 2008, the HUI (the index, not the ratio) moved from below 260 to approximately 360 (50-day moving average) only to plunge below 160 in October. The current move higher didn't take the miners even that far. The 50-day moving average in case of the HUI Index is now just slightly above 290 and the declining medium-term resistance line is also below 300. There's also additional resistance created by the late-April high of 293.47.
So, where does all of the above lead? Or to state the question more precisely - what becomes the most probable outcome given all of the above?
We saw strength and a breakout in the mining stocks and it seems that we could see some short-term strength in this part of the precious metals sector. Consequently, we suggest closing the speculative short positions in the miners.
At the same time, it doesn't seem that the rally will be significant and we don't suggest betting on it. In fact, if the HUI Index moves higher from here, we don't expect it to move above 300.
Furthermore, we don't think the above will impact gold and silver to a considerable extent (in a large part due to their recent weak performance relative to the USD Index) and, thus, we suggest keeping the short speculative positions (half of the regular positions that is).
Summing up, we suggest keeping speculative short position in gold and silver and being out of the precious metals market with one's long-term capital.
The stop-loss levels for the current short positions are:
- Gold: $1,428
- Silver: $23.55
We currently think that gold will temporarily move below $1,285, but pull back soon and close that week (the one in which it moves below $1,285) around this level. How low gold will temporarily go is unclear - perhaps it will form an intra-day bottom close to $1,200 or even $1,100.
Here's the up-to-date version of our trading/investment plan:
- When gold moves to $1,305 close the speculative short position in gold and get back in the market with half of your long-term gold and platinum investments.
- When silver moves to $18.20 close the speculative short position and in silver get back in the market with half of your long-term silver investments.
- When the XAU Index moves to 84, get back in the market with half of your long-term mining stock investments.
We will send a separate confirmation to get fully back in.
As far as trading capital is concerned we currently think that placing distant bids is appropriate. They may not get filled, but if we place them too high, we risk being thrown out of the market via stop-loss orders or margin calls if the volatility gets too high (and it's unpredictable how volatile the markets will get as gold is in a reverse parabola right now). If they don't get filled, we plan to go long after gold has pulled back significantly on an intra-day basis on huge volume (thus creating a bullish candlestick - probably a "hammer candlestick").
The distant buy price levels are:
- Gold: $1,120 (stop-loss: $970)
- Silver: $16.20 (stop-loss: $14.4)
- $HUI: 155 (stop-loss: 137)
As we wrote, these levels are distant and will probably not be reached, but if they do, they will present a great buying opportunity, one that will likely disappear almost immediately - that's why we we think that placing orders in advance is appropriate.
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 June, 2013 and we will send additional Market Alerts whenever appropriate. We have prolonged the time in which you - our subscribers - will receive Market Alerts daily for another full month.
Thank you.
Sincerely,
Przemyslaw Radomski, CFA
