Briefly: In our opinion a small (half of the regular size) speculative short position in gold, silver and mining stocks is justified from the risk/reward perspective.
Silver plunged below its critical support level and is now cheaper than it’s been for more than 4 years. This is a HUGE development and something that all precious metals investors absolutely have to pay attention to and take into account while making decisions regarding the precious metals market. In today’s alert we’ll discuss the implications of the breakdown and other important developments that have just happened on the precious metals market.
Let’s start with silver (charts courtesy of http://stockcharts.com.)
Silver’s breakdown is so significant not only because silver moved below the 2013 low. It’s so significant because we have not only seen a daily close below this important level, but also a weekly close. Silver didn’t end the week just a little below the 2013 low – it closed much lower. The move below the 2013 low was big enough to see it from the very long-term perspective.
With momentum this strong, will silver correct shortly? It certainly could, as its oversold on a short-term basis, but it now seems more likely that it will decline until it reaches support strong enough to stop the move, or – more likely – cause a corrective upswing within the decline. The closest support that could do it is in our opinion the rising long-term support line (based on 2000 and 2008 lows), which is currently slightly below the $17 level.
The RSI indicator is now slightly above the 30 level and with a move to the $17 level or slightly below it, it’s likely to reach the same level that triggered significant rallies in mid-2012 and mid-2008. Perhaps the corrective upswing would take silver back to the 2013 low and the decline would resume after this move.
Gold declined on Friday as well and the short positions have become more profitable. Is the decline over? The support level was not reached yet, so it’s probably not over. We continue to think we will see a move to $1,200 before the current short-term decline is over. Then we will be looking for a reversal followed by an even bigger decline.
We can draw the same conclusions based on the above gold to UDN ratio chart (non-USD gold price). The support line is close, but it has not been reached yet. Consequently, the decline may not be over just yet.
From the long-term point of view, when we compare gold’s performance to the performance of the bond market, we see that gold has already broken below its previous lows. There might be no important short-term implications, but the medium-term ones are significant and bearish. We have been writing for many months that the next big move is likely to be to the downside and we have just seen another confirmation.
The mining stocks’ breakdown was followed by more declines and the short positions have quickly become profitable. Miners have once again declined on relatively big volume and they have still not reached the next support level, so it seems that the decline will continue some more before we see a corrective upswing. At this time it seems that we could see miners at their May lows before they rally again. After the corrective upswing, we expect the decline to continue.
The decline that will follow the upcoming correction will likely be significant and the chart below is one of the reasons why.
Gold stocks' performance relative to the general stock market is something that we haven’t commented on in a while. Over a year ago we made a prediction (based on the Phi extension of the previous downswing) that the ratio would move very close to the 0.1 level and it has. It has been trading sideways since that time and it seems that its now ready to continue the previous move – which is down.
The most useful thing that the above chart tells us is that once the 0.1 level is broken and the decline continues, then there will be no strong support until the ratio moves much lower. This means that if gold stocks break lower – and they are likely to do so in the following weeks – they would be likely to decline significantly.
Here’s another chart that confirms the above outlook.
The ratio featuring juniors’ performance relative to other stocks has already provided an important medium-term sell signal and it remains in place. We have previously commented on it last Monday and our comments remain up-to-date also today:
(…) extremely high ratio of volumes in case of juniors and the general stock market. In short that’s another medium-term sell signal and a repetition of what we had seen last week. (…)
We have previously emphasized that when we compare the performance of the junior mining stocks to performance of other stocks (the general stock market) and focus on the ratio of volumes, we can get very useful medium-term signs. These signs are not useful in the short term, but have been effective when one focuses on performance of the precious metals sector in terms of weeks.
The volume on which juniors moved last week was extremely high when compared to the volume on which the SPY ETF moved (proxy for the general stock market), which is a bearish sign. We are likely to see another sizable move lower in the coming weeks, but not necessarily right away. This sign is in tune with what we can infer based on other charts.
Before we summarize, let’s take a look at the USD Index.
The USD Index moved higher on Friday, but – even though the USD Index is very overbought on a short-term basis – it might have not been the final top just yet. What we wrote in Friday’s alert remains up-to-date:
The USD Index rallied but it hasn’t moved above the resistance line based on 2005 and 2010 highs (the line is currently at approximately 85.35). The 2013 high is at 84.97 - only a bit higher than we see the USD Index today.
At this time we can’t rule out some more strength, but it’s not likely to be significant before the USD Index finally corrects.
Please note that the space between the 2013 and the upcoming high is a huge U-shaped bottoming pattern, something that could be the base for the cup-and-handle pattern. After the USD corrects we could see some sideways movement (the handle would be formed), which could correspond to a sideways trading in the precious metals sector very close to its 2013 lows – perhaps verifying the breakdown below them.
(…) it doesn’t seem likely to us that this was the final top for this rally. Why not? Because individual currency pairs (most of them) such as the EUR/USD have not yet reached their support/resistance level yet. Consequently, the 85.35 target seems to be a more likely target than the 84.97. In other words, the rally in the USD Index and the decline in the precious metals sector (even the short-term one) are likely not over yet.
Summing up, while the USD Index and the precious metals sector are still likely to correct their most recent moves, it now seems likely that they will move “just a little” before they do indeed correct. Silver’s breakdown was clearly visible and this kind of sign of momentum is likely to be followed by further weakness before we see a turnaround. Both gold and the mining stocks seem likely to decline just a little more before they correct and it seems that it will be the case also with the white metal. Based on the significance of silver’s breakdown and the level at which the next strong support currently is, it seems that silver will decline visibly once again before correcting. Consequently, it seems to us that opening small short positions in silver might also be a good idea. It also seems that the speculative short positions in gold and mining stocks will be even more profitable in the coming days, so we don’t suggest closing them just yet.
To summarize:
Trading capital (our opinion):
Short position (half of the regular size of the position) in gold with stop-loss at $1,246 and the target price at $1,204 (it seems that having an exit order at this time at this level is a good idea in most cases)
Short position (half of the regular size of the position) in silver with stop-loss at $18.33 and the target price at $17.06 (it seems that having an exit order at this time at this level is a good idea in most cases)
Short position (half of the regular size of the position) in the mining stocks with stop-loss at $24.40 (in case of the GDX ETF) and the target price at $22.23 (GDX ETF; it seems that having an exit order at this time at this level is a good idea in most cases)
Long-term capital (our opinion): No positions
Insurance capital (our opinion): Full position
Please note that a full position doesn’t mean using all of the capital for a given trade. You will find details on our thoughts on gold portfolio structuring in the Key Insights section on our website.
Our preferred ways to invest in and to trade gold along with the reasoning can be found in the how to buy gold section. Additionally, our preferred ETFs and ETNs can be found in our Gold & Silver ETF Ranking.
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
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