Briefly: In our opinion no speculative positions in gold, silver and mining stocks are now justified from the risk/reward perspective.
Yesterday’s price action in the precious metals market was very specific. Gold declined very little, silver declined much more, and mining stocks moved a bit higher. When we see a mirror image of such action (gold pauses, silver rallies and miners decline a bit), it’s usually a sign of a top. Have we just seen a local bottom? Let’s take a look at the charts (charts courtesy of http://stockcharts.com), starting with silver.
Why has silver underperformed recently? As always, there is no clear explanation behind any price move (other than because someone pushed the “sell” button), but it seems to us that it can be in a large part attributed to the sharp decline in the general stock market.
If we are just seeing the beginning of another huge decline, then we are still quite likely to see a sharp rally in silver, just before the big drop. In other words, what we have written about the silver market previously remains up-to-date:
The current situation is similar to what we saw in March. Silver declined after a local top was formed close to the turning point, then bounced a bit and then it moved a bit below the previous low. Back in March it rallied for a few days only to disappoint and plunge shortly thereafter. This scenario seems quite probable at this time, not only because of the similarity on the above SLV ETF chart but also because of the situation in the currency markets.
The trend is down for both the short and medium term, but since gold has not declined as much as it “should” based on the dollar’s rally, it still seems likely that a correction is just around the corner.
Mining stocks remain above the declining support line, which means that the situation in this part of the precious metals sector hasn’t changed much. Actually, the situation improved a little, because miners could have declined based on Friday’s big intra-day reversal – and they didn’t. With this negative factor out of the way, we are left with the support line as a bullish factor.
All in all, the situation is unclear for mining stocks – but with a bullish bias.