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

This week started with another sizable downswing and we saw a breakdown in gold (charts courtesy of http://stockcharts.com.)

Gold has finally moved below the rising support line. The implications are bearish but not strongly bearish just yet, as the breakdown is not confirmed. If we see two more closes below this line or a close below $1,300 level, we will view the breakdown as confirmed.

At that time, we might open a speculative short position in gold and/or exit the long-term investment (currently keeping half of the regular position is justified in our opinion).

Gold is currently already below the levels we saw before the Crimea crisis even though the situation is not more stable then it was back then. This is a kind of underperformance of the yellow metal and a bearish sign. If Russian troops advance further into Ukraine, the price of gold might jump again. If that doesn’t happen, the decline is likely to continue.

Meanwhile, the decline in silver continues. The white metal is now practically at the $20 level and quite close to previous lows. Once silver breaks below these lows, we expect the decline to accelerate. At this time, however, silver might be a bit too oversold on a short-term basis and we might see a correction before the decline continues. It’s not likely to be significant or long-lasting, though. Silver’s lack of strength given the dollar’s small move lower on Monday suggests that the trend is still down.

In the previous alert we wrote the following:

The GDX ETF closed below the rising support line and the 50% Fibonacci retracement level for the third consecutive trading day and the breakdown is now complete. If we hadn’t mentioned the extra short position in miners previously, we would suggest it today. Please note that the small move up that we saw in the past 2 trading days materialized on low volume after a huge-volume decline. This suggests that the real move is down and that miners simply took a breather.

Miners declined significantly and on heavy volume, and the above remains up-to-date. We might see some kind of correction soon, but we don’t think it will last or be significant.

We previously emphasized the importance of the long-term sell signal from the Stochastic indicator:

We saw a big downswing also in the HUI Index and it resulted in a major sell signal from the Stochastic indicator. In the past 3 years all cases (and many cases before 2011) when we saw this signal were followed by major downswings.

This signal is still in place – it’s likely to have further bearish implicatinos. By this we mean that since the declines that followed these signals were big in previous cases, we expect to see a big decline also this time. We continue to think that the 2008 low can be reached once again.

The USD Index corrected a small part of the last week’s rally and, in consequence, one might expect metals and miners to rally – they haven’t. The precious metals sector reacts to the dollar’s rallies by declining and doesn’t react to the dollar’s declines. This is a bearish combination and a sign that metals will need to move lower before they form a bottom.

All in all, we can summarize the current situation in the precious metals market in the same way we have been summarizing it for the last couple of 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 case Russian troops move further into Ukraine – and we can’t rule it out at this time – gold will likely gain and once again outperform silver and mining stocks.

The technical picture for silver and – especially – for mining stocks is bearish, so in our opinion short positions here are justified from the risk/reward perspective. We might add to the short position in silver and open one in gold relatively soon – we will keep you informed.

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 positions: silver (half) and (full) 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