Briefly: In our opinion short speculative positions (half) in silver and mining stocks are justified from the risk/reward perspective.
The precious metals sector declined yesterday, which was likely to happen regardless of many factors pointing to a different conclusion, or simply because the precious metals sector was overvalued. The question is if we (charts courtesy of http://stockcharts.com) think that lower precious metals values are likely:
They are. The Euro Index is still below the declining long-term resistance line and it’s still likely to decline. What we wrote previously is also up-to-date:
Consequently, the index is likely to decline sooner rather than later and this could trigger a decline in the precious metals sector. Of course, if the situation in Ukraine gets worse, PMs might rally or the decline could be postponed, but at this time the tendency for this market seems to be to move lower.
Gold was likely to move lower based on numerous technical factors and it has. The decline is not significant yet, but the volume on which the decline has materialized suggests that it will soon be. The small breakout above the 38.2% Fibonacci retracement level was just invalidated, which is a bearish sign.
As far as silver is concerned, we didn’t see a major plunge, but we see a move below the 2008 high once again. Overall, silver’s recent moves are not bullish (it almost hasn’t reacted to the situation in Ukraine) and the outlook remains bearish.
Gold wasn’t the only part of the precious metals sector that invalidated a move above a previously broken retracement – miners also declined below one, an important one. The GDX ETF moved below the 61.8% Fibonacci retracement level and invalidated the breakout above it. Moreover, just like it was the case with GLD, the move took place on huge volume.
Now, the miners haven’t moved below the rising support line (at least not yet), so the short-term outlook isn’t extremely bearish, but it seems that we will see lower mining stock values relatively soon.
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.
Next page: Stocks or metals?
If the precious metals market declines, it seems that short positions in silver and mining stocks will gain more than the long-term investment in gold will lose, and if the sector rallies, then gold’s appreciation – due to its outperformance – can more than make up for the loss on the short positions in miners and silver. Naturally, the above depends on the size of the positions, but still, it seems that utilizing this spread (long gold and short silver and miners) has been a good idea.
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 stabilizes.
To summarize: Trading capital (our opinion): Short position (half): silver and 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.
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.