Gold Forecast: Silver in the Spotlight

Gold didn’t do much yesterday, but there was more than one thing happening that served as an additional bearish confirmation. The most important sign came from silver’s short-term outperformance.

As you can see on the above chart, gold formed a bearish reversal candlestick yesterday, and it moved lower in today’s pre-market trading. Since it has just moved to a new monthly low, it could be the case that yet another small corrective upswing is already over.

“Yet another,” as gold has been declining in a back-and-forth manner for a few weeks now. As I explained yesterday and in the previous weeks, this makes the current situation similar to what we saw previously – in 2013.

Between September 2012 and February 2013, gold declined in a back-and-forth manner as well, and the current situation seems to be analogous to what we saw in February 2013. At the time, the final short-term upswing took gold to its 50-day moving average (marked with blue), and we saw something very similar recently. The recent high ($1788.40) was very close to gold’s 50-day moving average too – less than $10 from it.

Silver Takes Center Stage

However, as I wrote at the beginning of today’s analysis, the key bearish sign of yesterday’s session came from silver.

While gold ended yesterday’s session only 0.02% higher, silver ended it 1.20% higher. This means that silver outperformed gold yesterday. Silver’s short-term outperformance of gold is bearish, especially when it’s accompanied by mining stocks’ weakness relative to gold.

While miners didn’t underperform gold yesterday, they did so on Friday. Thus, it’s fair to say that we saw a mix of those two important signs, and they together paint a bearish picture for the short run.

Despite the intraday rally, the GDX ETF ended yesterday’s session completely unchanged.

And while gold and silver moved slightly higher, GDX did nothing, and the GDXJ ETF underperformed, just as it was likely to.

The GDXJ declined by 0.1%. This may not be a lot, but the GDXJ was once again one of the weakest parts of the precious metals sector, which bodes well for our profitable short positions in the junior miners. The fact that this was the lowest close that we saw so far (!) this year adds to the bearish implications.

The USD Index

So far, the USD Index is just a bit higher in today’s pre-market trading, but it seems that the next big run-up is at hand.

Why? Because the USDX has been consolidating above the inverse head and shoulders pattern breakout for a long time, and it’s relatively uncommon for the consolidations to take this long — let alone even longer.

And as the USD Index rallies, gold, silver, and mining stocks are likely to decline. Since they are weak even without USD’s help, the upcoming decline in the PMs and miners is likely to be profound.

Summary

To summarize, the outlook for the precious metals sector remains extremely bearish for the next few months.

The decline to new lows in practically all important proxies for mining stocks despite a lack thereof in gold serves as an important short-term confirmation for the bearish case. However, the key two long-term factors remain the analogy to 2013 in gold and the broad head and shoulders pattern in the HUI Index. They both suggest much lower prices ahead.

And as silver often moves in close relation to the yellow metal, when gold falls, Silver is likely to decline as well – it has probably already started its slide. The times when gold is continuously trading well above the 2011 highs will come, but they are unlikely to be seen without being preceded by a sharp drop first.

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Thank you.

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Sunshine Profits - Effective Investments through Diligence and Care

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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 subject to change without notice. Opinions and analyses are 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 deemed 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.

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