Article originally published on October 7, 2014.
Briefly: In our opinion speculative long positions (full) in gold, silver and mining stocks are justified from the risk/reward perspective.
The precious metals market finally rallied yesterday. Gold moved lower in the first hours of the session, getting very close to the Dec. 2013 low, but it rallied before the session was over, finally closing over $16 higher. Is the final bottom in?
The final bottom – not likely. The local bottom – very likely. Let’s examine the charts and see what actually changed (charts courtesy of http://stockcharts.com.)
Yesterday, we wrote the following:
The Friday’s rally was huge and it’s no wonder that metals and miners declined. The move took place right after the cyclical turning point, so the odds are that we will not have to wait long for a reversal.
All in all, the outlook for the USD Index is still bearish based on the extremely overbought status, the turning point, and the fact that previous similar breakouts (as seen on the weekly chart) were invalidated.
We already saw a significant daily decline yesterday, so it could be the case that the corrective downswing in the USD Index is already underway. The odds will further increase once we see a move below the rising short-term support line (which is likely to be seen shortly).
What about the precious metals market? It rallied and it’s likely to rally even more.
Gold moved almost to its Dec. 2013 intra-day low, which is a very important support, so this fact by itself makes a move higher very likely. The fact that gold rallied shortly after declining to this level and ended the session over $16 higher (and forming a reversal hammer candlestick) makes the situation even more bullish. This kind of action is likely to be followed by further rallying.
We recently commented about the gold to USD Index ratio as something that could provide us with technical confirmations. Based on Friday’s and today’s price moves we saw a small decline below the 2008 high (and 2013 low) that was followed by another move higher. Before viewing the decline as a breakdown, please note that back in 2008 the ratio also moved very temporarily below the horizontal support only to invalidate this move and rally shortly thereafter. It seems that we are seeing this type of action once again.
Silver moved higher and is once again visibly above the rising, long-term support line. The white metal is likely to rally based on this support combined with its heavily oversold status.
Today, we would like to cover a very interesting event that happened in the platinum market yesterday. More precisely, it concerns the platinum to gold ratio. Namely, platinum became, very temporarily, cheaper than gold, and this situation was quickly reversed. The entire event happened on huge volume in the ratio (the ratio of volumes). This kind of action (significant events, reversals and huge-volume sessions) quite often happens at the end of a given move. In this case, the preceding move was definitely down.
As far as the mining stocks are concerned, our previous comments remain up-to-date:
Gold stocks are now very close (almost at) their 2013 low, which is a major support level. Combined with a strong support for gold and silver and their oversold status, the above provides us with bullish implications also for the mining stocks sector.
Just a little more strength in the HUI Index will mean an invalidation of the breakdown below 2 support levels, which will be another strong bullish sign.
Summing up, the situation in the precious metals market is still bullish for the short term, even if Friday’s intra-day action might suggest otherwise. Monday’s price action seems to be the true direction in which the market is likely to head next – up. The corrective downswing in the USD Index has probably already begun. The same goes for the precious metals sector, only in this case, the correction would be to the upside. A lot of money has been saved by staying out of the precious metals market in the past months with one’s long-term investments (details below), and it seems that the corrective upswing will provide additional profits from the trading capital.
Trading capital (our opinion):
It seems that having speculative (full) long positions in gold, silver and mining stocks is a good idea:
- Gold: stop-loss: $1,172, initial target price: $1,249, stop loss for the UGLD ETF $11.29, initial target price for the UGLD ETF $13.56
- Silver: stop-loss: $16.47, initial target price: $18.07, stop loss for USLV ETF $23.94, initial target price for the USLV ETF $31.73
- Mining stocks (price levels for the GDX ETF): stop-loss: $19.94, initial target price: $23.37, stop loss for the NUGT ETF $18.25, initial target price for the NUGT ETF $28.99,
In case one wants to bet on higher junior mining stock ETFs, here are the stop-loss details and initial target prices:
- GDXJ stop-loss: $28.40, initial target price: $37.14
- JNUG stop-loss: $6.19, initial target price: $16.34
Long-term capital (our opinion): No positions
Insurance capital (our opinion): Full position
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.