Briefly: In our opinion short speculative positions (half) in silver and mining stocks are justified from the risk/reward perspective.

The precious metals sector declined once again yesterday, but generally, the outlook remains unchanged. Here’s why (charts courtesy of http://stockcharts.com.)

Gold moved lower but not low enough to break below the rising support line. With gold being the outperformer and with the situation in Ukraine still being tense, gold might hold up relatively well even if the rest of the precious metals sector declines. The move below the rising support line (marked in red) could symbolize the start of another big downleg regardless of the geopolitical tensions. For now, gold price is not close to this support, even though the outlook remains bearish.

Silver declined significantly once again and is at its March lows – below the $21 level. The white metal currently underperforms both gold and mining stocks. In Friday’s second alert (after the metals‘ rally) we wrote the following:

We quite often see silver outperform gold on a temporary basis when either the general public's interest in the precious metals market suddenly increases and right before silver's big declines. The two could happen at the same time, of course.

(...)

Still, on a short-term basis, the fact that gold caught the attention of the general investment public resulted in a short-term upswing in the sector - including silver.

When gold is making headlines, it’s usually good to consider exiting the sector, not adding to ones positions.

It seems that the temporary increase in metals‘ popularity was indeed what caused the temporary rally. Overall, the outlook remains bearish.

The miners‘ invalidation of the move above the 61.8% Fibonacci retracement level resulted in further declines, as expected. The GDX ETF hasn’t moved below the rising support line, though, which means that the situation hasn’t become more bearish as far as short term is concerned. It was bearish and still is, but it’s not really more bearish.

For mining stocks, however, the rising support line is much closer than it is the case with gold. If miners break below it (and they likely will), gold might follow.

All in all, we can summarize the current situation in the precious metals market in the same way we have been summarizing for the last couple of previous days:

It seems that the precious metals sector will move lower in the coming weeks, but just in case the situation in Ukraine deteriorates, we are keeping half of the long-term investment position in gold. In fact, gold has been outperforming both silver and mining stocks since Russian troops entered Crimea.

If the precious metals market declines, it seems that short positions in silver and mining stocks will gain more than the long-term investment in gold will lose, and if the sector rallies, then gold’s appreciation – due to its outperformance – can more than make up for the loss on the short positions in miners and silver. Naturally, the above depends on the size of the positions, but still, it seems that utilizing this spread (long gold and short silver and miners) has been a good idea.

It seems to us that if it weren’t for the events in Ukraine, the precious metals sector would be already declining and perhaps testing the 2013 lows or moving below them. This could still take place and it’s quite likely to happen once the situation in Ukraine stabilizes.

To summarize:

Trading capital (our opinion): Short position (half): silver and mining stocks.

Stop-loss details:

• Silver: $22.60
• GDX ETF: $28.9

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

Insurance capital: Full position.

You will find details on our thoughts on gold portfolio structuring in the Key Insights section on our website.

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