​Gold Trading Alert originally published on August 27th, 2015 7:03 AM:
 
Briefly: In our opinion, short (full) speculative positions in gold, silver and mining stocks are justified from the risk/reward point of view.
 
Yesterday we saw another big daily decline and it served as an additional confirmation that taking profits on long positions and entering short ones on Monday, at 2PM (when the GDX was at $15) had been a good idea. Will the short positions become more profitable in the future?
 
The only honest answer to this kind of question is “we don’t know”, but we do think that it’s very likely. The reason is the combination of several technical factors, the similarity to October 2014 and the way the precious metals perform relative to the USD Index. Let’s start with the former by looking at the charts (charts courtesy of http://stockcharts.com). 

​In Tuesday’s alert we wrote the following:
 
(…) more significant resistance levels remain just above where gold is right now. The 61.8% Fibonacci retracement and the declining resistance line coincide at about $1,170, which is our current target for the yellow metal.
 
(…)
 
Gold moved to $1,169.80, so effectively it moved to the mentioned target level, before declining. More importantly, it declined on huge volume, which is a very bearish sign. Moreover, we saw a sell signal from the Stochastic indicator and it very often corresponded to major local tops in the past. The implications are bearish.
 
Gold has indeed declined in the past few days and the decline took place on big volume – which serves as a bearish confirmation. Moreover, gold broke (insignificantly, but still) below the short-term rising support line. The outlook remains bearish.

​Speaking of breakdowns, silver just broke below the major support in the form of the 2014 low. Remember when “everyone” (at least many precious metals analysts) wrote that the final bottom in silver had been formed back in November 2014, but we didn’t? Well, the theory that the final bottom was behind us was just proven incorrect.
 
The implications of yesterday’s move are not yet very bearish, but will likely soon become such. The reason is that the breakdown has not been verified just yet. The support is significant, so the breakdown could easily be invalidated, so it’s better to wait for additional several closes below the 2014 low and a weekly close. All in all, the situation deteriorated based on yesterday’s decline, but not significantly so.

We can say exactly the same about the above GDX chart as we saw a very similar pattern, only from the short-term perspective:
 
The implications of yesterday’s move are not yet very bearish, but will likely soon become such. The reason is that the breakdown was not verified just yet. (…) All in all, the situation deteriorated based on yesterday’s decline, but not significantly, so

​The above HUI Index (proxy for gold stocks) chart has the same implications, but it’s particularly interesting in light of the size of the decline in miners and metals. Namely, if gold and silver are likely to decline significantly (note the targets in the silver chart), then it’s very likely that mining stocks will decline significantly as well.
 
Miners are already very oversold from the long-term point of view, but it seem that they will need to become extremely oversold before the final bottom is seen. That’s just how the markets work – moving from excessive optimism to excessive pessimism and vice-versa. If miners are to decline significantly, then how low can they go? To the lower support levels, and the 2001 high and the late-2001 low seem low enough for the decline in miners to correspond to the big declines in gold and silver that we expect to see in the following months.
 
All in all, many technical factors point to lower prices, but, as mentioned earlier today, there’s more. The analogy to October 2014 is also a very bearish factor. We described it on Monday in the following way (and it remains up-to-date also today as the analogy continues):
 
Today’s session is very volatile, not only in case of the general stock market and the USD Index, but also in some parts of the precious metals market, and it’s a good example that a lot can change in a relatively short period.
 
Today’s session is definitely a significant one as there are not many cases when stocks and USD plunge sharply at the same time. Since it’s likely important, it’s also important that we check what is the likely impact on the precious metals sector.
 
As mentioned above, there were not many similar days to what we saw today on the stock market, but there is one day that is definitely similar. On Oct 15 2014 the S&P 500 declined significantly (after a big slide) and reversed in a major way. It was not the final bottom, but a day ahead of it. It looked very (!) similar to what we’re seeing today.
 
What happened on other markets? Was the session at least somewhat similar in them as well? Not only somewhat, but very.
 
That was a few days before gold’s local top and before a great shorting opportunity.
 
Silver was not outperforming before this local top, but there was significant intra-day volatility at that time. We’re seeing something similar also today and in the past few days.
 
After the initial sharp rally, mining stocks started to disappoint once again and Oct 15 2014 was a great day to be moving from long to short positions. Miners were rallying sharply recently, but started to underperform recently as well.
 
What did the USD do? It declined sharply to a significant support level (back then it was the 40-day moving average and right now the May and June 2015 lows serve as support - the USD Index moved temporarily below them but it’s once again above these levels at the moment of writing these words).
 
The implications of the above similarity are very bearish, and so is the precious metals sector decline despite a major slide in the USD Index.
 
Speaking of gold’s underperformance relative to the action seen in the USD Index, the latter is basically unchanged this week (0.13% gain) despite the intra-week plunge, so one would expect gold to be more or less unchanged as well. Gold declined more than $35 this week. The underperformance is clear and it serves as another confirmation of the bearish outlook.
 
Summing up, we believe that the outlook for the precious metals market deteriorated once again yesterday. The analogy to the similar session (Oct. 15, 2014), gold’s underperformance relative to the USD Index, and other technical signs make us think (our opinion) that much lower prices are in the cards and that the short positions will become much more profitable than they already are.
 
To summarize:
 
Trading capital (our opinion): Short position (full) position in gold, silver and mining stocks is justified from the risk/reward perspective. Precise stop-loss orders and initial target prices are available to our subscribers.
 
Long-term capital (our opinion): No positions
 
Insurance capital (our opinion): Full position
 
You will find details on our thoughts on gold portfolio structuring in the Key Insights section on our website.
 
Thank you.
 
Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Gold Investment & Silver Investment at SunshineProfits.com
 
 
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Disclaimer
 
All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

​Free Trading Alert originally published on August 12, 2015, 11:14 AM.
 
Correlation seems almost like a magical word. In fact, most people don’t have to use this term more often than a couple of times a year. In the world of investing, however, correlation is an important concept which has to do with how different assets move in relation to one another. Before we even dive into what correlation means in the world of statistics, we’ll focus on the intuition behind it.
 
Investing in gold and silver, mining stocks or other precious metals usually has the goal of earning a positive return. This is usually done by taking a position in an asset. For instance, an investor buys gold in hope of the appreciation of the yellow metal. If the price of gold goes up, there is a gain. If it goes down, there is a loss. All this is very simple but the purpose of this example is to show that the price fluctuations are very important to precious metals investors and traders.
 
The price of gold is one of the most important figures precious metals investors look at. But gold is not the only asset in the precious metals market. Silver and mining stocks are also very important. How do they relate to one another? Do gold and silver move in the same direction? Is the relationship stable? Maybe the relationship is different for different time horizons?
 
There’s more. The exchange rate of the U.S. dollar is one of the most important economic indicators for the U.S.-based precious metals investors. The largest mining stocks are quoted on stock exchanges. Is there a relationship between the miners and general stock market indices such as the Standard and Poor’s 500 (S&P 500)?
 
Now, the relationships we’re writing about can be either positive or negative. Positive in the sense that an increase in one indicator coincides with an increase in another. For instance, an increase in the price of gold might coincide with an increase in the price of silver. It can also be negative. For instance, an increase in the exchange rate of the U.S. dollar might coincide with a decrease in the price of gold priced in the dollar.
 
How to measure the sort of relationships we’re writing about? Correlation provides a way to quantify this. It puts a number on the relationship. This number ranges from -1 to 1 where the most negative number (-1) corresponds to a perfectly negative relationship (when one quantity goes up, the other goes down), while the most positive number (1) corresponds to a perfectly positive relationship (when one quantity goes up, the other goes up as well).
 
Of course, the real world is not perfect, meaning that the correlation almost never is exactly -1 or 1. Instead, it is usually a number somewhere in between. The closer the number to -1, the stronger and more negative the relationship used to be in the past. The closer the number to 1, the stronger and positive the relationship used to be in the past. There is also a third “special” number here, namely 0, the midpoint of the range. The closer the correlation is to 0, the weaker any kind of past relationship is. When the number is close to 0, we might say that there has been no correlation between the two quantities.
 
How might this be of use to precious metals investors? Let’s take a look at the correlations in the first week of August 2015 to see what they might tell us. We will do this by looking at the Correlation Matrix – our tool which calculates the correlations in the precious metals market and presents them in an easy-to-digest form.

​A couple of words of introduction to the tool are in order here. The column on the left-hand side shows you the pairs of assets that the correlations have been calculated for. For instance, in the first row below the header of the table, we have “Gold / Silver.” This means that this row shows the correlations calculated between gold and silver. The second row is labeled “Gold / USD.” This denotes the correlation between gold and the U.S. dollar. As such, the second row displays correlations between gold and the greenback.
 
Now, you have probably noticed that each row displays various correlations, not just one number. The different numbers show you the correlation over a given number of days, from 10 to 1500 (10 and 30 are marked as short-term, 90 and 250 as medium-term, 750 and 1500 as long-term). These different numbers of days are organized in columns (10, 30, 90 and so on). Putting the rows together with the columns gives you specific correlations. For example, the number in the “Gold / Silver” row, in the 1500 column is 0.89. This means that the correlation between gold and silver over the last 1500 days was 0.89. If you look at the “Gold / S&P” row and the 10 column, you see -0.27. This means that the correlation between gold and the S&P 500 index over the past 10 days stood at -0.27.
 
To make things easier for you, we have marked the correlations with arrows – green, red and yellow. Green arrows show you potentially strong positive correlation, red ones potentially strong negative correlation while yellow indicate that the correlation might be moderate (in either direction). The easiest way to read this is that a green arrow shows you that the two assets (indices) tended to move in the same direction, a red that the assets tended to move in opposite directions while a yellow one that the assets tended to fluctuate rather independently.
 
Now, let’s move to specific numbers from the table. It is commonly believed among precious metals investors that gold and silver tend to move together. With the Correlation Matrix we can verify this claim. In the “Gold / Silver” row and the 1500 column, we see 0.89 and a green arrow. This means that gold and silver in fact tended to move together over the last 1500 days (which is approximately 6 years). So, in the long term, the yellow metal tended to move together with the white metal.
 
The long term, however, is not all that interests us. So, let’s look at shorter time horizons. We see that the correlation between gold and silver is above 0.9 for all the horizons between 30 and 750 days. This means that in the time horizons of a month to six years (more or less) gold and silver tended to move in the same direction and strongly so. Where things get interesting is the shortest time horizon, 10 days. The correlation here is 0.64. This means that in the last 10 days gold and silver still moved in the same direction but not as strongly as in, say, the last month or the last couple of years. The implication is that the relationship in the last couple of days might have been weaker than it tended to be over the short term. This is still not very significant divergence for now but it might be in the future. Just imagine the correlation between gold and silver dropping to 0 over for the 10 day time span. This would be an important indication that the relationship between gold and silver is not as it tended to be, and so a measure worth observing.
 
One way to use this is to consider the short-term correlation in light of the long-term one. For instance, in the “Gold / USD” row we see the long-term correlation between gold and the U.S. dollar at -0.34 (1500 days). This means that over the long term gold and the dollar tended to move in opposite directions but definitely not perfectly so. A short glance at the short-term columns (10 days & 30 days) shows the correlations at -0.72 & -0.76. This suggests that in the recent days gold has tended to move in the opposite direction than the dollar and stronger than over longer past horizons. So, the relationship between gold and the dollar might have been stronger recently than it was on average over the last couple of years.
 
This might be read in two ways. Firstly, it might mean that given the more negative than usually correlation, gold might move up more in a lockstep with gold than it generally used to in the past. A move down in the dollar could be accompanied by a relatively stable move up in gold. Secondly, we might see the correlation as reverting to its long-term value. This implies that the temporarily stronger correlation between gold and the dollar might go back to weaker, less negative levels. This suggests that the short-term correlation should not be relied upon for long-term bets and it shouldn’t be the only indicator you take into account making your trading decisions.
 
Our last example will focus on silver and the U.S. dollar (“Silver / USD” row). It shows how you can combine the info on correlation with charts, for example to call a local bottom. The long-term correlation (1500 days) between silver and the U.S. dollar used to be negative at -0.54. The shorter-term correlation for the 30 day window is even more negative at -0.83. But the 10 day correlation is much weaker and not that negative at all (0.18). What might this mean? That silver has very recently stopped moving together with the U.S. dollar. Let’s take a look at the U.S. Dollar Index chart (charts courtesy by http://stockcharts.com).

​We see that up to Aug. 6, 2015, the move up in the dollar was up. At the same time, silver didn’t exactly move in the opposite direction as shown by the 0.18 short-term correlation. This might have suggested that silver was now not moving typically with respect to the dollar. In typical times a move up in the dollar might be accompanied by a move down in silver, albeit not a perfect one (long-term correlation at -0.54). The weak short-term correlation at 0.18 might have suggested that silver was trading in a different way than it usually does. In this specific case, this could mean the refusal to decline when the dollar appreciates. This, in turn, could have pointed to strength in silver and a possible move up in the future. The move up is already transpiring but it might continue even further. In this way, using the Correlation Matrix together with charts might give you additional insight into the precious metals market.
 
If you enjoyed the above discussion of gold correlations and our analysis, we encourage you to stay up-to-date with our free articles and alerts - sign up for our gold mailing list today. It’s free and if you don’t like it, you can easily unsubscribe.
 
Regards,
 
Mike McAra
Bitcoin Trading Strategist
Sunshine Profits: Gold & Silver, Forex, Bitcoin, Crude Oil & Stocks
Sunshine Profits: Gold & Silver Trading Alerts
Stay updated: sign up for our free mailing list today
 
 
 
 
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Disclaimer
 
All essays, research and information found above represent analyses and opinions of Mike McAra and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Mike McAra and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. McAra is not a Registered Securities Advisor. By reading Mike McAra’s reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Mike McAra, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.
 

LONG TERM TREND                             BEARISH
INTERMEDIATE TERM TREND              BEARISH
SHORT TERM TREND                           BEARISH
VERY SHORT TERM TREND                 BULLISH
 
We said in last week’s blog that gold was clearly attempting to form a base for a rally back up to 1130-1140 and this appears to have been a correct call.  After successfully testing 1080 as support on three separate occasions last week, gold broke out above the 20 DMA at 1102 and has hit a high of 1120 this morning.  The price is also well above the 80 hour and 200 hour MAs which have both now turned upwards.

The 1130 level will provide strong resistance after being major support for so long and a break above this level targets 1150.  We do not expect a rally much higher than 1150, as the bears remain in complete control with 1000-1050 still the near term target.

Equities remain weak as the uncertainty in China weighs on prices, whilst oil has stabilised with the price climbing back up towards $50 a barrel after a prolonged sell off.

Support can be found at 1102, 1094, 1082-1080, 1074, 1045, 1000, 950, 867 and 806.  The break of 1130 is very bearish for gold and suggest a return to 1000-1050 in the first instance.

Resistance can be found at 1120, 1130, 1142, 1147, 1163, 1170, 1175, 1184, 1204, 1208-1210, 1215, 1220-1223, 1235 and 1252-1256.  Gold has broken below the 2014 lows and looks be headed much lower.

Today's video for subscribers looks at the recent trading in more detail and our strategy for today's trading session.

LONG TERM TREND                             BEARISH
INTERMEDIATE TERM TREND             BEARISH
SHORT TERM TREND                           BEARISH
VERY SHORT TERM TREND                NEUTRAL
 
Gold has halted the recent decline and has been consolidating in a range between 1080 and 1105 for the past week or so, with the price direction quite volatile and trading opportunities limited.  Gold is clearly attempting to form a base here for a rally back towards 1130-1040, however a break of recent lows near 1080 will suggest another sharp down leg is underway, with 1050 the first target and 1000 below that.

A general weakness in commodities, primarily driven by Chinese economic uncertainty, is helping to depress the gold price, with the Eurozone situation a lot calmer since Greece went to the edge of the abyss and peered over a few weeks back.

Equities remain weak as the uncertainty in China weighs on prices, whilst oil continues to tumble with the price now well below $50 a barrel and looking very weak.

Support can be found at 1080, 1074, 1045, 1000, 950, 867 and 806.  The break of 1130 is very bearish for gold and suggest a return to 1000-1050 in the first instance.

Resistance can be found at 1103-1106, 1110, 1130, 1142, 1147, 1163, 1170, 1175, 1184, 1204, 1208-1210, 1215, 1220-1223, 1235 and 1252-1256.  Gold has broken below the 2014 lows and looks be headed much lower.

Today's video for subscribers looks at the recent trading in more detail and our strategy for today's trading session.

​Gold News Monitor originally published on July 31, 2015, 9:18 AM.
 
Last month, the 2015 edition of the In Gold We Trust report was released. What can we learn from this publication?
 
As always in June, Incrementum AG (an independent asset management & wealth management company based in the Principality of Liechtenstein) published its annual “In Gold We Trust” report, the extended version of which can be downloaded here. We know that it was published one month ago; however, it took a while to dig through the 140-page text. Because it offers many interesting insights into the current global economy and the gold market, we provide a short summary for you today.
 
The main idea of the report is that there is a constant struggle between deflationary and inflationary forces. Since 2011, disinflationary forces have clearly dominated the market (think about the declines in commodity prices). According to the authors, this is why so many market participants have lost faith in gold. However, if the inflation trend reverses, excellent opportunities in inflation-sensitive investments such as gold will emerge. They point out that we now actually witness inflation, not consumer price inflation, which occurs always later, but rather asset price inflation. The authors believe that governments and their central banks will eventually tackle the increasing debt problem with money printing and inflation. 
 
We doubt that inflation is the main driver (especially in the short term) of the price of gold (in 80s and 90s the price of gold was falling despite inflation). We argue that the price of gold reacts more to the faith in the current monetary system, and it is in a sense a reciprocal of the credibility of central banks. The authors agree with that, since they explain the disappointing gold performance in dollar terms last year, by pointing out that “at the moment, it appears as though faith in the omnipotence and infallibility of central banks is at an all-time high”. They also mention other factors behind the weak trend, such as strong disinflationary trends and the associated increase in real interest rates, the Fed’s tapering and declining money supply growth rate, rising opportunity costs due to a rally in stock markets, increase in risk-appetite, and rising expectations of a Fed’s rate hike.
 
Although the report seems to attach too much importance to the relationships between debt, inflation and gold, and to Asian demand, and it incorrectly predicted China’s official reserves (“we believe it is realistic that China now holds 4,000 to 6,000 tons”), it provides interesting information. For example, the global gold price (gold price not in US dollars, but in the trade-weighted foreign exchange value of the dollar) already entered a new uptrend in the autumn of 2014, gold exhibits clear seasonal trends with the second half of the year being the strongest, and the global gold trading volume amounted to 550,000 tons last year, which is roughly equivalent to 188 times annual mine production (this fact explains why the mine production does not drive the price of gold).
 
In the context of the FOMC July meeting and the Fed’s possible hike, they point out that although the federal funds rate and gold prices exhibit clear negative correlation, some periods can be observed during which the relationship collapses (indeed, three of the largest gold rallies of the post-1971 era occurred in rising nominal rate environments).
To sum up, the last edition of the In Gold We Trust report is a very lengthy, but interesting publication. Although we recommend skepticism on the authors’ long-term gold price target of $2,300 per ounce within three years (it seems that they have stuck to this target since 2007), they properly define gold as an “antithesis to paper money” and a monetary asset (not as just another commodity), realize gold’s safe-haven and portfolio diversification features, and cite convincing explanations for the relatively weak performance of the price of gold (in U.S. dollar terms) last year.
 
Regards,
 
Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
Sunshine Profits: Gold & Silver, Forex, Bitcoin, Crude Oil & Stocks
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Disclaimer
 
All essays, research and information found above represent analyses and opinions of Arkadiusz Sieron and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Arkadiusz Sieron and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Sieron is not a Registered Securities Advisor. By reading Arkadiusz Sieron’s reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Arkadiusz Sieron, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.