Briefly: In our opinion speculative short positions (full) in gold, silver and mining stocks are justified from the risk/reward perspective. We are adjusting the stop-loss levels (again), so in a way we are locking-in even more of the profits from the current positions and, at the same time, keeping a chance of increasing them.
Gold, silver and mining stocks plunged heavily last week. We saw major events such as breakdowns and we saw some key levels being reached. The miners’ slide and the silver’s and gold’s breakdowns were widely commented, but there are additional developments in the ratios that investors and traders need to consider at the moment.
Before moving to the ratios, let’s start with the U.S. dollar (charts courtesy of http://stockcharts.com).
What’s next? The cyclical turning point is at hand, so we might not see many more daily upswings in the near future. The closest resistance is at the previous October high, about an index point above Wednesday’s close. Consequently, we are quite likely to see another sharp upswing, but it also seems likely that the USD Index will at least pause after reaching its previous high, at or close to the turning point.
We indeed saw a sharp upswing in the USD Index yesterday and also in today’s pre-market trading. Today, the USD Index moved to 86.74, which is very close to its early-October high of 86.87. We could see a pause or another decline from here, especially that the cyclical turning point is at hand. The situation in the currency market is very interesting at this time (especially in the USD/JPY pair) but that’s something that we will discuss in today’s Forex Trading Alert.
The USD Index moved even higher – to 87.25, but closed only slightly above the previously-broken level. It’s still quite likely to decline given the unconfirmed status of the breakout and the cyclical turning point. Consequently, the above remains up-to-date.
Let’s move to metals. Has the outlook become bullish for the precious metals sector based on the above? Just as we wrote in Friday’s alert – not necessarily.
From the long-term perspective we see that this month’s rally was in fact a corrective upswing that took gold to combination of strong resistance lines. It was a breather that we expected to see and as it’s already been seen, so we can now expect the decline to continue. Perhaps the next big slide is already underway.
The big slide is already underway and profits from the short positions have become even bigger. However, could they grow even further before the decline is over? Yes, and the reason for that is that in today’s pre-market trading gold moved below the 2013 low of $1,179.40. The breakdown is not confirmed at this time, but this price level is so visible and profound, and closely-watched that perhaps even an unconfirmed breakdown could trigger further selling, and thus declines. At the moment of writing these words gold is at $1,164 after moving to $1,161 and correcting a bit. There has been no invalidation of the breakdown.
It turned out that gold closed the day and the week below the 2013 intra-day low. The move is not clearly confirmed, but more confirmed than it was before the session started and when we sent the previous alert.
Consequently, the situation is still tense, but the close below the previous lows suggests that the next move will be to the downside. It will be much more certain if we see 2 more consecutive closes below this level.
Please note that the RSI indicator is not at a level that would suggest a major bottom.
When silver finally gives in and breaks this level [the rising long-term support line], it’s likely to catch up with gold and miners and decline sharply. Please note that once this support is taken out there will be no other support to stop the decline until the white metal moves below $15.
Is silver still a great investment when one takes a few years into account? We think so.
Can silver plunge very low before it starts another powerful rally regardless of its favorable fundamental situation? Yes, it can.
Silver broke below the rising support line and it indeed quickly caught up with gold and miners by declining sharply. Silver closed at $16.17, well below the support. The next strong support is below $15 so we could a see a big slide even without additional bearish triggers (such as a rally in the USD Index).
As you know, miners plunged significantly as well.
If they repeat yesterday’s decline, they will reach our initial target levels. Just a few weeks ago some would call 150 in the HUI Index “unthinkable.” It will quite likely be a reality today or in the next few days. The miners’ recent performance suggests further declines especially that there were no big declines in the general stock market.
There is no significant support that could stop the decline before the 2008 lows, so it’s likely that these levels will be reached. Moreover, gold stocks and silver stocks could move even lower without a bigger correction (that’s a bit unclear at this time, though).
The “unthinkable” move to the 2008 lows has indeed become reality. Both important indices moved very close to these lows – close enough to say that they were more or less reached. The key question is – is the bottom in? Our initial target has already been reached, so we could see an upswing, but given gold’s breakdown, we could also see a very sharp downswing. Consequently, exiting short positions here might be premature.
All in all, we have a visible breakdown in silver (declines are likely), small breakdown in gold (declines are likely, but the situation is not as bad as it is in the case of silver) and a move to the initial target in the case of mining stocks (rather bullish implications). Overall, the situation is not crystal clear at this time if we take a look at metals and miners only.
Let’s take a look at ratios.
As you may recall, the HUI to gold ratio at its 2000 bottom is one of the things that we were expecting to see as the final bottom confirmation. However, at this time there are not enough additional signs to change the overall outlook (based on the silver to gold ratio, for example, we are likely to see further declines).
Can the above chart not mean that the final bottom is in? Yes. There were generally 2 cases, when the ratio dropped sharply and approached important (not as important as this one, but still), long-term support levels: in 2008 and in early 2013. In both cases the previous lows didn’t stop the decline. In 2008 there was a small move below the support level before gold stocks rallied again and in early 2013 there was only a corrective upswing to the 2008 low that verified the breakdown – declines followed.
Consequently, our reply to the how significant is the move in the HUI to gold ratio to its 2000 low question is: not that significant as it’s not accompanied by many additional signals.