In short: In our opinion no speculative positions are justified from the risk/reward perspective, and we think that moving back to gold with one’s long-term investment capital is a good idea now.

Technically speaking, the situation in the precious metals market deteriorated on Friday (and taking into account weekly closing prices), but the most important events happened during the weekend.

The reason for us to suggest closing the short position is what happened after the markets closed – the escalation of tensions in Ukraine and the increased probability of a regular military conflict. As the Russian forces have already seized Crimea, the tensions increase every minute. We hope that the situation will be resolved peacefully and quickly, but from the analytical point of view, it seems that shorting the precious metals sector based on what is (was) very likely based on Friday’s data is not justified.

Given greater uncertainty and increased geo-political tensions we expect gold to outperform the rest of the precious metals sector in the near future. Technically, as you will see in the following part of today’s alert, the situation deteriorated. Therefore, if the tensions ease, the move lower could be simply bigger – markets would give away the tension-based rally and then move lower just as if this weekend’s events didn’t happen. Consequently, at this time we are not suggesting moving fully back in for the entire precious metals sector. Normally, we would suggest going back in with half of each part of the sector (gold, silver, platinum and mining stocks), but at this time it seems that it would be better to move back fully in with gold and leave the rest out. In this case we are somewhat half-in but are also positioned to utilize gold’s expected outperformance.

The reason we are moving in with the long-term capital now is that if things get much worse, then gold could rally quite far and we don’t want to risk being out with a significant part of the capital. We have not been suggesting being entirely out because the “insurance” part of the capital (i.e. physical gold and silver) was in the market at all times, but the “investment” part should now be positioned differently.

Hopefully, the situation will be resolved peacefully. In this case gold will resume its decline. We should see technical signs (i.a. declining volume) before that happens.

Here’s what the charts were saying on Friday (charts courtesy of http://stockcharts.com.)

Gold broke below the very short-term rising support line (marked with red) and it closed there for a 3 days. We now have a confirmed breakdown and the situation became even more bearish.

The volume was high when the GLD ETF declined on Friday, which is a bearish sign. In fact, we haven’t seen volume this large during a decline since the beginning of this year.

Let’s keep in mind that gold has invalidated the breakout above the 61.8% Fibonacci retracement level based on the August – December 2013 decline. This is also a bearish sign on its own.

Meanwhile, silver invalidated the breakout above the 50-week moving average, the 2008 high and the 61.8% retracement level based on the entire bull market. The weekly volume is highest in months, which confirms the significance of the invalidation. Actually, the last time we saw volume that was similar was at the beginning of the previous decline in mid-2013.

Silver is still above the declining red support line, but drawing an analogous line in mid-2013 would also have given us a breakout that turned out to be a fake one.

The next market that we would like to feature is the USD Index.

USD Index declined quite heavily on Friday, which was an unlikely event, but a one that made the outlook a bit clearer. The reason is that the decline right before the cyclical turning point makes the turning point something that is likely to ignite a rally. Before Friday’s decline we wrote that it was unclear how the turning point would affect the markets. Now it’s a bullish factor.

Let’s take a look the decline from the medium-term perspective.

While the short-term support line was broken, the lower medium-term support line held. This support has been in place for more than a year – it stopped a decline first time in early 2013. This is the 4th time that a decline is being stopped by this support (if it is indeed stopped, that is). Since the medium-term support (that already worked a few times) is much stronger than the short-term one.

The most important thing, however, about Friday’s decline is the way precious metals reacted to it. One might have expected precious metals to rally, but they didn’t. They declined and so did mining stocks. This is a very visible short-term underperformance and it suggests that lower values are to be expected for precious metals.

Now, as you’ve read in the first part of today’s alert, the above charts are not the most recent information. Things changed over the weekend and so did our approach. If it wasn’t for Russia’s military action, we would be considering doubling the sizes of the short positions. However, now it seems that short positions are too risky even if we see gold $100 lower before we see another $100 rally. At this time a quick spike in gold prices would not surprise us, which would likely cancel the positions as stop-loss levels would be reached. It doesn’t seem that going speculatively long is a good idea at this time either. The markets can move quickly lower if the tensions subside.

We might suggest changing the short-term speculative position and / or the long-term investment one shortly, based on how markets react and what happens in Ukraine. We will keep you – our subscribers – informed.

To summarize:

Trading capital (our opinion): No positions.

Long-term capital: Full position in gold, no positions in silver, platinum and mining stocks.

Insurance capital: Full position

Please note that we have started to include the insurance capital on the above list in order to avoid the impression that we suggest being entirely out of the precious metals market. Those of you who have been with us for a long time are well aware of this, but since a lot of new subscribers have joined us recently, we though a quick reminder should be useful.

We have suggested being out with one’s long-term investment capital, but being in as far as the insurance capital (physical precious metals holdings) is concerned. You will find details on our thoughts on gold portfolio structuring in the Key Insights section, but in short, it depends on your approach and experience. Below you will find a “portfolio” that we created for Eric – the fictional character that we use to illustrate suggestions (not investment recommendations) for beginning investors. More precisely, this was the portfolio before we suggested moving out of the precious metals market (so, before April 2013).

Now the “investment” category would be 0%, but the insurance remains at 44.1%. Please note that the average size for the trading position (we provide the netted amount in the above points regarding positions / trades) is just 1.4% of the entire capital in this case, so half of the position means using just 0.7% (11.8% is kept in cash / dedicated to trading but only a part of it is used for each trade). The entire portfolio report provides also 2 other fictional characters and their “portfolios”. John being the proxy for an experienced investor is the other extreme (Eric being the beginner). He “has” 17.6% in insurance capital and the average size of his trading position is 31.6% (half of which is 15.8%).

The bottom line is that if you assume that precious metals have much further to go (beyond 2011 highs) like we do, having just some money in the sector might appear as being out – and opening a small speculative short position in addition to it might seem as betting against it. When one looks at it from a “fresh perspective” without any assumptions about the gold bull and reads about shorting, they might get the impression that we suggest being entirely out of the market, which is not the case. Actually, the netted effect of small speculative short positions is simply hedging the insurance capital to a smaller or greater extent. It might be more than that if we suggest doubling the size of the short position, but that’s not the case just yet. Of course the above is not an investment advice and consulting an investment advisor before taking action regarding your portfolio is encouraged.

As always, we'll keep you - our subscribers - updated should our views on the market change. We will continue to send out Gold & Silver Trading Alerts on each trading day and we will send additional Alerts whenever appropriate.

The trading position presented above is the netted version of positions based on subjective signals (opinion) from your Editor, and the automated tools (SP Indicators and the upcoming self-similarity-based tool).

As a reminder, Gold & Silver Trading Alerts are posted before or on each trading day (we usually post them before the opening bell, but we don't promise doing that each day). If there's anything urgent, we will send you an additional small alert before posting the main one.

Thank you.

Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief.
Gold & Silver Trading Alerts