Gold & Silver Trading Alert: Confirmation of a Breakdown
Gold & Silver Trading Alert originally published on March 24th, 2014 8:58 AM:
Briefly: In our opinion short speculative positions in silver (half) and mining stocks
(full) are justified from the risk/reward perspective.
Friday was generally a calm day in the precious metals market and for the currency
indices. The initial moves higher (in the early part of the session) were mostly
invalidated later on and overall not much changed at the first sight. On second look,
the lack of rally confirmed the breakdown in mining stocks. Let’s take a look (charts
courtesy of http://stockcharts.com):
Interestingly, we can summarize the above chart in the same way that we did
previously, because the daily move that we saw on Friday didn’t change anything
Gold moved lower once again [on Thursday, but basically it didn’t do anything on
Friday] but still not low enough to break below the rising support line. Gold is still
outperforming silver and mining stocks (taking this month into account), but now the
extent of the outperformance is much smaller. Still, with the situation in Ukraine still
being tense, gold might hold up relatively well even if the rest of the precious metals
At this time we see that gold’s reaction to the events in Ukraine has been very
limited. When markets don’t react to factors that should make them move in a certain
direction, they will likely move in the opposite direction relatively soon. In this case, it
seems that gold will move lower.
The move below the rising support line (marked in red) could symbolize the start of
another big downleg regardless of the geopolitical tensions. For now, the price of
gold is already close to this support, but not yet below it.
Silver declined more than 5% last week. It moved below the rising support lines
and closed there on Friday, which is a bearish indication. The situation in silver is
oversold, but only on a short-term basis. Consequently, we could still see a corrective
upswing here before the decline continues. Miners confirmed their breakdown, but
there was no short-term breakdown in gold, so it’s not that clear whether the precious
metals sector – including silver – will move lower immediately. It could be the case
that miners while decline while metals will pause for a few more days.
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 previouly, 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.
The HUI Index closed the week without a meaningful move back up, and the sell
signal from the Stochastic indicator along with its implications remain in place. We
previously commented on it in the following way:
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.
The USD Index finally rallied last week and it seems that this year’s decline is over.
There are no sure bets in any market, but this week’s rally looks very similar to what
we saw in October 2013. Back then the currency was also a little below the rising
support lines only to come back with a vengenace. We saw this type of action last
week and the outlook was bullish.
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 fact, gold has been outperforming both silver and
mining stocks since Russian troops entered Crimea.
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
Trading capital (our opinion): Short positions: silver (half) and (full) mining stocks.
– Silver: $22.60
– GDX ETF: $28.9
Long-term capital (our opinion): Half position in gold, no positions in silver, platinum
and mining stocks.
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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