-- Posted Wednesday, 23 April 2014 |

Briefly: In our opinion no speculative positions are justified from the risk/reward perspective.

Yesterday’s price action in the precious metals market might seem perplexing to some investors and there’s good reason for it. Gold declined, but silver didn’t, and mining stocks actually managed to rally more than 1%. Let’s take a closer look (charts courtesy of http://stockcharts.com).

What we wrote yesterday about gold remains largely up-to-date:

Gold moved to its recent lows, but didn’t move below them. Technically, the situation hasn’t changed because of that, and thus, the outlook remains bearish, but it’s still possible that we will see some sideways movement or a small move higher before the decline really continues.

We still haven’t seen any breakdown, but we saw an attempt to move below the recent lows – a failed attempt. The latter is a bullish sign for the short term, even though the medium-term trend remains unaffected and down.

Moreover, please note that the GLD ETF has just formed a reversal hammer candlestick.

Gold priced in the Australian dollar moved lower as well and in this case we saw a completion of the bearish head-and-shoulders formation. Naturally, that’s a bearish sign. The move below the neck level of the formation is not huge yet, so the breakdown is not yet confirmed, but the situation is still more bearish than not.

Meanwhile, the platinum market still provides us with bearish implications. We saw a second daily close below the neck level of the head-and-shoulders formation. One more and the move will be confirmed.

Mining stocks, however, paint a quite different picture for the precious metals sector. Miners moved higher on Tuesday, despite a move lower in gold. This is a rather significant bullish sign for the short term. The volume was not huge, but the fact that miners managed to outperform gold so visibly is meaningful on its own anyway.

The situation in the USD Index remains very tense as it remains between two important lines (the declining resistance line and the rising support line). What we wrote yesterday in our gold commentary remains somewhat up-to-date:

The USD Index moved higher this week, but not high enough to do 2 things: to invalidate the move below the rising support line and to move above the declining resistance line. With the situation being unclear here, it seems no wonder that there was no decisive move in metals and miners. Once the USD rallies above the support/resistance levels, breakdowns in metals and miners are likely to follow, just as platinum suggests.

In general, the outlook for the precious metals sector remains bearish, but we may see a couple of days of sideways movement or slightly higher prices.

Only “somewhat” because of what we saw in the mining stocks and in gold. The precious metals sector looks ready to move higher in the short term (perhaps only a few days, but it seems very likely at this point), so even if we see a small move lower in the USD Index, it could trigger a visible move higher in the precious metals sector.

While the above is not enough for us to consider opening long positions (as the medium-term trend remains down), it does seem that the situation is no longer bearish enough for the short term to justify keeping open speculative short positions. Consequently, we are taking profits off the table (these were full short positions, so the profits are meaningful) and are getting ready to re-open short positions in the coming days (more likely) or weeks (less likely). We are focusing on short positions because we think the medium-term trend is still down, and thus (at least as far as short-term trades are concerned) short positions are less risky than long ones.

We previously opened short positions on March 5 with gold at $1,337.50, closed them on April 4 with gold at $1,297.25 and re-opened shorts on April 10 with gold at $1,320.50). We aim to repeat the above and we think that the circumstances now favor staying out of the market once again – for the record, gold closed at $1,283.10, so once again a short position was closed with the yellow metal almost $40 lower.

To summarize:

Trading capital (our opinion): No positions

Long-term capital (our opinion): No positions

Insurance capital (our opinion): Full position

Thank you.