Briefly: In our opinion no speculative positions in gold, silver and mining stocks are now justified from the risk/reward perspective. However, day-traders might consider a small speculative long position in silver.
The precious metals sector moved sharply lower yesterday – in tune with its medium-term trend. The decline was to a large extent connected with the breakout in the USD Index. It seems that it is the U.S. dollar that will determine the short-term moves in PMs and miners in the coming days and in today’s alert we focus on this relationship. The CCI Index seems to be in a particularly interesting position as well and this is something that gold & silver traders should be aware of.
Let’s start with the USD Index chart (charts courtesy of http://stockcharts.com).
The breakout indeed materialized yesterday, but it has not been confirmed yet (only 1 daily close above the Sep. 2013 high and we would like to see 3 of them before saying that the move is confirmed), which means that this makes the situation only a little more bullish. The combination of these factors seems more important than the unconfirmed breakout, so it seems quite likely that we will see a move lower shortly.
In yesterday’s Forex Trading Alert we commented on the possible reversal in the currency markets this week:
Please note that we will have a decision or at least more information regarding the European QE on Thursday - perhaps this will be the day when currencies reverse their direction for some time. We will keep our eyes open and report to you accordingly.
It could be the case that even if the decision that will be made on Thursday is bullish for the USD Index (big QE in Europe), we could see a “sell rumor but buy the fact” type of reaction. In other words, given the significantly overbought situation in the USD Index and the proximity of the turning point, we could see a reversal no matter what the officials say on Thursday.
The unconfirmed breakout in the USD Index translated into an unconfirmed breakdown in gold.
In other words, if the USD Index corrects, then we will be likely to see gold move higher in the short term. If, given the correction, gold stays above the rising support/resistance line, we will have a good possibility that the next big downswing will already be underway and it will probably be a great time to enter a short position.
While we’re at discussing the gold-USD link, we were asked if there [was] a chance that we could see a month long rally in gold with the likelihood of a falling dollar as we [were] at the cyclical turning point. In our opinion such possibility exists, but yesterday’s big-volume decline made it more probable that we will see a rather limited upswing. If gold soars more than $100 or so and mining stocks also rally, then it could change the medium-term picture to bullish. At this time, however, the volume suggests something opposite – we have been seeing higher volume with lower prices and low volume with higher prices. We will be monitoring the markets for signs of significant strength and report to you if we see them. For now – we think the medium-term remains bearish.
Our yesterday’s comments remain up-to-date:
The most interesting thing about the turning points in the USD and silver is that the one in silver is several days behind the one in the dollar. This paints a picture in which the USD Index declines first, causing silver and the rest of the precious metals sector to rally, perhaps sharply, but then silver’s turning point “kicks in” and metals and miners reverse and start declining. Let’s keep in mind that silver tends to outperform in the final part of a given upswing, so we could see a jump in the price of the white metal right before a downturn. Naturally, there are no guarantees that the above scenario will be realized, but it seems quite likely in our view.
What can we infer from the mining stocks chart?
Before summarizing, we would like to reply to another question that we have just received and we would like to provide you with one additional chart.
We were asked about our best approximation of the HUI Index if Dow was at 17,000 and gold at $1,100. Of course, there are no guarantees, but our best bet at this time is 150. The 17,000 assumption about the Dow doesn’t change much, as the HUI to gold ratio managed to slide in the past 2 years despite the rally in the former (despite short-term upswings, that is). It seems quite likely to us that when the precious metals sector finally bottoms, the HUI to gold ratio will move to its 2000 and 2009 lows – close to the 0.13 level. Multiplying this by 1,100 leaves us with 143 and 150 is the strong support that is closest to this level.
Summing up, while the medium-term has been down, the short-term outlook for the precious metals sector seems rather favorable based on the extremely overbought situation in the USD Index. The latter is likely to correct sooner rather than later based i.a. on its cyclical turning point and it’s quite likely that it will cause a move higher in PMs and miners.
Trading capital (our opinion): No positions
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.
As always, we'll keep our subscribers updated should our views on the market change. We will continue to send them our Gold & Silver Trading Alerts on each trading day and we will send additional ones whenever appropriate. If you'd like to receive them, please subscribe today.
Przemyslaw Radomski, CFA
Tools for Effective Gold & Silver Investments - SunshineProfits.com
Tools für Effektives Gold- und Silber-Investment - SunshineProfits.DE
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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.