Gold and HUI Short-term Strength Is a Strong Call to Action / Commodities / Gold & Silver 2019

Onesurprising news was followed by another surprising news. First, Trump told theworld about his plan to keep increasing tariffs on Mexico, defying his ownparty. Then, no hint of relief had come regarding the China trade dispute.Finally, we have got the Feddiscussing potential interest rate cuts. Investors have aggressivelyincreased their bets on such monetary policy easing. Gold definitely welcomedthat idea. Is its breakout to new 2019 highs inevitable?

It'snot a sure bet, but a move to these highs just became more likely. Are theabove-mentioned changes in investors’ expectations well founded? Notnecessarily.

Typically,gold prices are believed to be inversely related to the interest rates. As aresult, the interest rate cut should be positive for the gold prices. However,the cut in the federal funds rate by September is widely expected by themarkets, so it should be already priced in. Hence, a lot of will depend on thesignal sent by the Fed about the future stance of the monetary policyaccompanying that move. But, frankly speaking, we do not see why the Fed shouldcut the interest rates by September. Unless we see a recession, the cut remainsunlikely. The Fed should telegraph it earlier, but so far it only announced apause in the tightening cycle, not its end. The wait-and-see mode does notnecessarily imply a cut later in the future. In 2016, the Fed also paused for ayear its tightening (from December 2015 to December 2016), but it did not cutthe federal funds rate, it did not reverse the tightening move from the end of2015.

Sincethe market was once again surprised yesterday, it may take a few extra daysbefore the situation stabilizes and before the market can decline once again. Ifthe Powers That Be keep on bombarding the markets with more news, it may take afew extra weeks. We don’t like the additional delay in the decline, and we’remore than certain that neither you do. But, some things don’t depend on us, forinstance President’s Twitter account. Instead of focusing on what is beyond ourcontrol, let’s focus on what we can do within our circle of control. That’s oneof the basic Stoic rules that is very useful in life in general, butparticularly so in case of the markets.

Finally,and perhaps – most importantly – we need to check if what we’re seeing rightnow is or isn’t a repeat of what we saw in the first half of 2016. Gold andgold stocks are moving higher which makes both situations similar. That’s notenough, though, because there were also other cases when gold and gold stocksmoved higher and it turned out to be just a corrective upswing that wasfollowed by more declines.

Backin 2016, investors were also wrong about the interest rate cuts. It was thetime when Janet Yellen just mentioned negativeinterest rate policy even though she had no intention of introducing it.It was only mentioned. Investors panicked anyway and gold soared. So, doesit necessarily matter if investors are right or wrong about the interest rates,if their panic can result in a powerful rally anyway?

Themarkets didn’t move much yesterday, but their relative performance was quiteimportant.

InsightfulComparative Assessment of PMs Sector

Goldminers closed the session higher once again, while silver didn’t outperformgold, even on a very short-term basis.

Goldstocks tend to outperform in the early part of the move while silver catches upat its end. The above may suggest that we are in the early part of the move.And even if it is not the case, it indicates that the move is not yet over.

The goldto silver ratio is after a major breakout – actually two breakouts.But, does it mean that the ratio can move only up in the short term? No.

Theperformance of the gold to silver ratio – it’s relentless rally – suggests thatthe medium-term remains intact. The metals are moving lower in the next severalmonths. But, since we saw two breakouts – above the previous long-term highs,and above the rising red resistance line – we could see some kind of correctiveaction in the short term.

Thisaction could easily translate into temporary silver outperformance that wouldconfirm the end of the rally.

It’snot something that’s likely to change the medium-term outlook, though.

Let’stake a look at gold’s long-term chart.

HowFar Can This Gold Rally Run?

Goldis approaching its long-term resistance created by the previous highs. There isone very interesting rule regarding this resistance. No matter how volatile orpromising the rally above the red resistance line was, it was always (in thelast couple of years) invalidated in the following week. Given today’s pre-marketrally in gold, it seems that we might see a weekly close above it. This meansthat the next week would quite likely include the invalidation of the currentbreakout and the beginning of another slide lower.

However,let’s keep in mind that gold has been very volatile and that there are still 3sessions to go until the end of the week, so it might rally in a more visiblemanner.

XAU’s– gold and silverstocks’ proxy’s – very long-term chart seems to confirm the above.

Thepowerful long-term resistance is just above the current levels – at about 75.However, earlier this year, we saw brief attempts to move above it before thedecline continued. So, it could be the case that the precious metals miningstocks still move higher before turning south again.

Goldstocks to gold ratio moved substantially lower in the previous years, but let’skeep in mind that its downtrend was temporarily breached earlier this year.Since it happened once, it might happen again. Of course, that would likelytake place only on a temporary basis, but this could easily mean a week or twoof additional rallies.

Ona medium-term basis, we see that the breakdown below the rising support lineswas invalidated and the implications for the short-term are bullish.

Theabove chart shows that the HUI Index reversed right at its triangle-vertex-basedreversal.The rally would have likely been much smaller if it wasn’t for the surprisingnews. Since the markets have to digest quite a few surprising developments, itmay take additional several days before the situation calms down and the pricesresume their downtrend. The 120 level still appears to be the quite likelydownside target for the following months (the initial downside target that is),but it’s quite possible that miners will move even higher before reversingtheir course.

Oneof the most important short-term signs for gold is its relationship with the USdollar. And it currently has bullish implications.

Thelast couple of days were relatively normal in terms of the reaction, but it wasalready visible that gold is showing more strength than it used to do in earlyMay. The USD Index is barely below its May lows, while gold is well above itsMay highs. This might have been accidental, but we are seeing a majorconfirmation of gold’s strength in today’s pre-market trading.

TheUSD Index is down by just 0.12 and goldfutures contract is already up by about $14. This is a confirmation of gold’sshort-term strength. We dive deep into the gold-USD charts, targets of theirupcoming short-term moves and our sharpened game plan in the freearticles section on our website. Drop by and have a look.

Before summarizing, wewould like to quote yesterday’s section on dealing with market’s volatilitythat can be unpredictable at times. It definitely remains up-to-date.

Something in Addition to (Insteadof?) Patience

(…)Patience is extremely rewarding while investing, but there is another way todeal with markets’ unpredictability.

It’sdiversification.

Forinstance, those who diversified into silver are likely much calmer now thanthose who are trading only mining stocks (by the way, we give silver priorityover gold in our managed futures service). But the diversification potentialdoesn’t end there. While the precious metals sector was impacted by the Trump’strade comments in a bullish way, the impact on the crude oil market was verybearish. It was very positive for our shortposition in crude oil, which we had opened on April 23rd, right after crudeoil closed at $65.55. Monday’s closing price is exactly $53.25. That’s over $10in crude oil (about 15%) in less than 1.5 months. That’s way over 100%annualized. There were also multiple profitable trades in our forex trades.There are no trades open at the moment, but we are making thisyear’s currency analyses available for you to review.While an individual surprising news may be negative for one market, it can bepositive for a different market. In other words, diversification allows to getprofitable in a smoother, more predictable manner. It’s not as comfortable asinvesting in a fully managed fund, or a trading program, but it’s somethingthat greatly helps along the path to profits on an individual basis.

Then,there are also time perspectives. The recent moves may be significant on aday-to-day basis, but either by zooming in or zooming out, this can bemitigated.

Thelong-term approach – naturally connected with patience – means focusing on thebig price moves instead of the brief ones that take just a few days and viewingthe latter as price noise. It’s not stressful, if one chooses to focus ondifferent kind of moves. The downside here is that for longer periods, one maynot have any positions at all, missing some good opportunities along the way.

Alternatively(or additionally), one could be zooming in – into day trading. It’s noteveryone’s cup of tea as it requires more time and attention on a daily basis.But by making multiple tiny trades, no single big move is likely to have aparticularly adverse effect. Surely, a single position could be closedunfavorably, but the stop-loss orders in such cases are very close and thesingle transaction barely changes anything. For instance, during the testingperiod of our DayTrading Signals, we had 42 trades and quite a few of them were notprofitable, but despite these cases, overall (!) we managed to achieve theperformance of 0.68% profit per trade (given no leverage for cryptocurrenciesand 10x leverage for other assets).

So,both: patience and diversification can help to deal with markets’unpredictability. It’s usually the case that the more patience and the morediversification one applies, the better the results and the greater theresulting peace of mind.

Summary

Summingup, the current upswing in gold, silver, and mining stocks continues to appeartemporary, but – based i.a. on how strong gold is relative to the USD movement,and silver’s lack of strength – it seems that the precious metals market mightmove quite visibly higher before reversing (likely next week). Despite thechange in short-term outlook, the medium- and long-term downside targets remainintact.

It'sunclear how high gold will go, given the current strength relative to the USDX,but the previous highs of about $1,350 or even $1,370 are not out of thequestion. Neither price level would invalidate the bearish outlook for themedium term. With gold at about $1,370 and gold to silver ratio verifying itsbreakout at 89, silver could be at about $15.40 or so. The relative performanceof gold, silver, mining stocks and the USD Index should give us keyconfirmations of that longer-timeframe outlook.

Today'sarticle is a small sample of what our subscribers enjoy regularly. They knowabout both the market changes and our trading position changes exactly whenthey happen. Apart from the gold-USD Index implications, we've also shared withthem which side of the argument Dr. Copper (the metal with PhD. in economics) isat. We encourage you to sign up for our daily newsletter, too - it's free andif you don't like it, you can unsubscribe with just 2 clicks. If you sign uptoday, you'll also get 7 days of free access to our premium daily Gold &Silver Trading Alerts to get a taste of all our care. Sign up for the free newslettertoday!

Thank you.
PrzemyslawRadomski, CFA
Editor-in-chief,Gold & Silver Fund Manager
Sunshine Profits - Effective Investments through Diligence and Care

* * * * *

All essays, research and information found above represent analyses andopinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. Assuch, it may prove wrong and be a subject to change without notice. Opinionsand analyses were based on data available to authors of respective essays atthe time of writing. Although the information provided above is based oncareful research and sources that are believed to be accurate, PrzemyslawRadomski, CFA and his associates do not guarantee the accuracy or thoroughnessof the data or information reported. The opinions published above are neitheran offer nor a recommendation to purchase or sell any securities. Mr. Radomskiis not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFAreports you fully agree that he will not be held responsible or liable for anydecisions you make regarding any information provided in these reports.Investing, trading and speculation in any financial markets may involve highrisk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees andaffiliates as well as members of their families may have a short or longposition in any securities, including those mentioned in any of the reports oressays, and may make additional purchases and/or sales of those securitieswithout notice.

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.