Precious Metals Decline on Huge Volume

By Przemyslaw Radomski, CFA  MAR 18, 2014 3:36 PM

What happens next in this sector depends on the situation in Ukraine.

 


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 my firm thinks that lower precious-metals values are likely:
 

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They are. The Euro Index is still below the declining long-term resistance line, and it's still likely to decline. What my company 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.
 

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Gold was likely to move lower based on numerous technical factors, and it has. The decline isn't significant yet, but the volume on which the decline has materialized suggests that it soon will be. The small breakout above the 38.2% Fibonacci retracement level was just invalidated, which is a bearish sign.
 

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As far as silver is concerned, there wasn't a major plunge, but there is a move below the 2008 high once again. Overall, silver's recent moves aren't bullish (it almost hasn't reacted to the situation in Ukraine), and the outlook remains bearish.
 

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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 Market Vectors Gold Miners ETF (NYSEARCA:GDX) moved below the 61.8% Fibonacci retracement level and invalidated the breakout above it. Moreover, just like it was the case with the SPDR Gold Trust ETF (NYSEARCA: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, I'm 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.
 
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 already be 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 (my opinion): short position (half): silver and mining stocks.
 
Stop-loss details:
Silver: $22.60
GDX ETF: $28.9
 
Long-term capital (my opinion): half position in gold, no positions in silver, platinum, and mining stocks.

Insurance capital (my opinion): full position.
 
For the full version of this essay and more, visit Sunshine Profits' website.

Twitter: @SunshineProfits
No positions in stocks mentioned.

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