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Gold and Silver: With Bearish Signs in Precious Metals, What's Next?

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As the dollar rallies, precious metals decline.

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The entire precious metals sector declined yesterday, even gold. Has the situation changed enough to double the short position? Let's take a closer look (charts courtesy of http://stockcharts.com).



Miners once again moved lower by more than 1%, and the volume -- while still not huge -- was higher than on the previous day. Increasing volume during a downswing is a bearish sign, especially since the day before the decline started, we had seen a move up on tiny volume.

Miners moved below the October 2013 high, but they did not move below their previous local low (the most recent one) and back below the 50% Fibonacci retracement level. The situation is bearish, but it doesn't look like it has deteriorated.


Click to enlarge

Gold moved lower on relatively high volume, which is a bearish sign. We also saw another sell signal from the RSI and Stochastic indicators. The situation on the above chart has clearly deteriorated, but the move lower has not been significant enough yet to make the situation extremely bearish.


Click to enlarge

Yesterday, my firm wrote the following about the Euro Index:

The situation on the currency markets remains unchanged. The Euro Index is likely to decline based i.a. on the long-term declining resistance line that was recently reached, but not broken.

Even if we had assumed that there was a small breakout above the declining resistance line, it would have been invalidated yesterday. The short- and medium-term implications are bearish for the Euro Index and for the precious metals market. They will become stronger if we see continuation of the decline in the former.



As one might have expected, a decline in the Euro Index meant a move higher in the USD Index. That's not a surprise as the US dollar was right at the medium-term support line and was likely to move higher once again shortly. I am quoting the following from Tuesday's report:

The medium-term USD Index chart suggests that we are still likely to see much higher USD values. The index is right at the long-term (or medium-term depending on one's approach) support line and after a breakout. It's an index just waiting to start a big rally. A rally in the USD Index to the 85 level or so would likely have a devastating effect on the precious metals market, and this type of rally could be seen based on the above chart.

If the USD really rallies and gold refuses to decline, then we will be happy to conclude that the medium-term decline in the precious metals market is probably over. It simply doesn't seem to be the case just yet.

The above remains up to date.



In Monday's alert, my firm commented extensively on the juniors' outperformance and its implications. We summarized that it was not necessarily a bullish sign, and that the last four years' performance suggested that we were approaching a local top. We also wrote that the sell signal from the Stochastic indicator would be an important event - we wrote that a sell signal from Stochastic could actually trigger a decline on its own in the current state of the market.

We have just seen this signal, so the situation has further deteriorated from this perspective.


Click to enlarge

Last, but not the least, we would like to discuss the situation in the silver market. My firm previously wrote about the 50-week moving average that was likely to keep the rally in check. Yesterday, silver invalidated a small, unconfirmed breakout above this resistance and at the same time moved back below the 2008 high. The bearish implications of these events will be much stronger if silver closes the week below these levels, but the outlook deteriorated somewhat based on yesterday's price action anyway.

Also, please note that the volume is already quite significant for this week even though only three trading days have passed. Silver is declining this week, so this is a bearish indication.

All in all, we can summarize the situation by writing once again what we wrote yesterday: "With the currency market being a major (!) threat to the precious metals market's rally and indications that this market will move lower at least in the short run, we think the short positions are justified." The situation has deteriorated somewhat based on several signals, but it doesn't seem to be extreme enough to justify doubling the short positions just yet.

For the full version of this essay and more, visit Sunshine Profits' website.

Twitter: @SunshineProfits
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No positions in stocks mentioned.
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