Risk/Reward for Gold and Silver is Getting More Attractive, But …

On May 5, I received the following e-mail:

“Hi Simon, With all this volatility, why don’t you want to initiate any trades? For example a low risk trade as shorting XLU and QQQ? Gold, Silver, Platinum, Natural Gas, Oil look to me as a great long candidates. I don’t understand why you are staying on sidelines at the best time you can trade.”

Here is my reply:

“True, purely based on technicals, there are trades out there, but we lack confirmation of our other indicators to confirm such a trade. I have learned that no trade is better than a bad trade, and that a bad trade is more likely when data is conflicting. We didn’t short QQQ, because of the open chart gap. Feel free to go long gold or silver, and we’ll revisit how that trade is going in a few weeks (please see recent PRRs for more details on why we are not buying silver and gold at these prices). Seasonality for XLU is pretty strong the next several weeks, so shorting it is not ideal.

I’m itching to recommend a trade … once the risk profile improves. Hope this helps a bit. Best, Simon”

I haven’t yet sent an e-mail to revisit the gold and silver trade (I don’t like to rub things in, so I won’t), but lets take a moment to revisit gold and silver.

The April 20 Profit Radar Report looked at technicals, gold sentiment and gold seasonality and concluded the following:

Gold Update

Out of the three driving forces we monitor for gold (technicals, sentiment, seasonality), technicals look the most bullish. Sentiment says risk is elevated. Immediate up side potential is limited based on seasonality.

Important chart support is around 1,200 and 1,160 – 1,130. We are looking to buy gold at a price tag of 1,200 or below. We will reassess our buy limit once (and if) we get closer to 1,200.”

Barron’s rates the iSPYETF as a “trader with a good track record.” Click here for Barron’s assessment of the Profit Radar Report.

The same analysis along with long-term gold and silver charts and sentiment data were also published here on May 5: Gold and Silver Bulls Risk Painful Whipsaw

On Monday, gold fell as low as 1,202, which makes buying much more attractive than it was near 1,300. It now becomes an exercise of patience and fine-tuning to peg the right buy limit.

We may see another up/down sequence before a more ideal low (see chart for potential support levels). The biggest knock against buying right now remains gold sentiment.

Silver

The April 13 Profit Radar Report stated that: “A move above 16.40 could result in a move towards 17.8.”

Silver peaked at 18.075, and the April 24 Profit Radar Report warned that: “Seasonality and sentiment suggest danger ahead. We eventually would like to own silver, but the risk/reward ratio doesn’t become attractive until price drops towards 16 and below.”

Silver fell as low as 15.84 and retraced 50% of the prior gains. There are some oversold readings and silver may bounce, but more bullish sentiment will likely have to be worked off before a more lasting low is reached (see chart for potential support levels).

The corresponding ETF charts for gold and silver – SPDR Gold Shares (NYSEArca: GLD) and iShares Silver Trust (NYSEArca: SLV) – paint the same picture.

Continued gold and silver analysis is available via the Profit Radar Report.

Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s profile of the Profit Radar Report). The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013, 17.59% in 2014, and 24.52% in 2015.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

 

Gold Looks So Bad, it Might Actually be Good

Gold is having another bad year, and most ‘pros’ are looking for even more losses:

  • “Gold teeters near five-year low after ‘bear raid’, more losses expected” – Reuters
  • “3 Trends that are burying gold prices” – CBC News
  • “Why gold is falling and won’t get up again” – MarketWatch
  • “The one chart that shows that gold may not be as safe as you think” – The Independent

Every gold bear should know that the market has a nasty habit: It likes to fool the crowded trade.

Based on the above headlines, short gold is the crowded trade.

Past experience has shown that using a combination of seasonality, sentiment and technical analysis to project (or at least try to project) gold prices is most effective.

Using this approach helped prepare for the September 2011 all-time high (August 24, 2011 Profit Radar Report: “Gold will melt down faster than its melting up. At some point investors will have to sell holdings to pay of debt or answer margin calls. The most profitable asset is sold first. Gold has been the best performing asset for a decade and a liquidity crunch could produce sellers en masse”).

The December 29, 2013 Profit Radar Report built a case for new lows around 1,000:

We would like to see a new low (below the June low at 1,178). There’s support at 1,162 – 1,155 and 1,028 – 992. Depending on the structure of any decline, we would evaluate if it makes sense to buy around 1,160 or if a drop to 1,000 +/- is more likely.”

Gold did bounce right around 1,162 – 1,155 last year, but is now coming back to test 1,028 – 992.

Here’s an updated look at seasonality, sentiment and technical analysis:

Seasonality

Gold seasonality projected a rough second half of July, but is turning significantly bullish in early August.

You may view the gold seasonality chart here: Gold Seasonality Chart

Sentiment

Most gold sentiment gauges are nearing extremes. Trend followers (the crowded trade) are bearish, but business insiders (smart money) are anticipating higher prices.

The chart above plots gold prices against the net futures positions of commercial hedgers (= people or entities in the business of mining, transporting or trading gold).

This is the latest available data, but since the CFTC reports on Friday (using data of Tuesday), it is already over a week old. Chances are commercials are even more bullish now than shown on the chart.

Regardless, commercial hedgers have scaled down their short exposure in anticipation of rising prices. Their timing is not always right on the money, but they rarely end up on the wrong side of the trade.

Technical Analysis

Gold is nearing a long-term support zone. A new low against a bullish RSI divergence, panic selloff (which Monday could have been) or move back above 1,135 is likely to spark a tradable rally.

This doesn’t mean gold won’t resume its decline later on, but prices appear to be near a short-term exhaustion point.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013 and 17.59% in 2014.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

 

This Line is More Important for Gold Than the 200-day SMA

Back in December you couldn’t get investors to touch gold even with a 10-foot pole. From low to high, gold has rallied 13% since and analysts are starting to up their full-year targets. This could be a costly mistake.

About 50 days ago analysts gave gold a snowball’s chance in hades to move higher.

The December 2013 headlines below show that investors were as bearish about gold as they were bullish about the S&P 500 (NYSEArca: SPY).

Bloomberg: Gold’s drop to lowest since 2010 seen extending next year by Goldman Sachs
Forbes: Gold may be on verge of a waterfall-style decline
Wall Street Journal: Gold is testing last ditch support before it falls further into the abyss
Bloomberg: Gold trades below 1,200 as growth outlook curbs haven demand
Wall Street Journal: Gold’s glimmer gone, mutual funds feel the pinch

Those bearish headlines and other sentiment gauges contributed to this contrarian assessment by the December 29 Profit Radar Report: “Gold sentiment is very bearish (bullish for gold) and prices may bounce here.”

Up until February 11, gold’s rally attempts were feeble, with gains of less than 4% since the December 31 closing low at 1,204.

Gold broke free of its short-term technical shackles on February 12, when the Profit Radar Report noted: “Gold has broken above red trend line resistance (dashed red line), but has been held back so far by silver’s inability to move above 20.64. Odds favor higher gold prices as long as 1,254 holds.”

Silver confirmed gold’s move on February 14 (when it surpassed its prior highat 20.64), which helped gold jump above its 200-day SMA.

However, as the weekly long-term gold chart shows, there’s significant trend line resistance right around 1,335, which has kept a lid on gold’s rally.

The short-term daily gold chart illustrates additional short-term support/resistance levels. It also shows that RSI confirmed the recent rally high, which suggests new highs in the future.

However, any new highs could be short-lived. A thorough analysis of gold money flows – in particular Gold ETFs like the SPDR Gold Shares (NYSEArca: GLD) and iShares Gold Trust (NYSEArca: IAU) – strongly suggests that new lows for gold and silver are still ahead.

The article below reveals the reliable pattern that tends to accompany major gold bottoms. The Missing Tell-Tale Sign of a Lasting Gold Market Low

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Gold ETF Assets Tumble To 5-Year Low, but Lack Tell-Tale Sign of Major Low

Two gold sentiment gauges have plunged to 5-year lows as investors can’t get out of gold ETFs fast enough. Extreme sentiment often sends prices higher, but the big tell-tale sign of a major low is still missing.

Is gold sentiment bearish enough for a sustainable snap back rally?

There are dozens of sentiment indicators related to broad stock market indexes like the S&P 500 (NYSEArca: SPY), but there are few for precious metals.

We looked at one of them – the Commitment of Traders Report – on December 6. Large speculators had dialed down their long futures exposure to the lowest level in five years (see chart and article here: COT Report: Large Speculators are Giving up on Gold).

Large speculators (whether it’s S&P 500 or gold) generally find themselves on the wrong side of the trade, so today’s gold bounce makes sense. But is it just a relief rally or the beginning of something big?

Here’s another, in the past reliable, sentiment gauge: Investors commitment to own gold ETFs like the SPDR Gold Shares (NYSEArca: GLD) and iShares Gold Trust (NYSEArca: IAU).

According to data from State Street (SPDRs) and BlackRock (iShares), GLD and IAU held over 1,550 tons of gold earlier this year, an all-time high.

Since then however, investors have been rushing out of GLD and IAU as the combined total of gold held dropped to 1,004 tons.

Is there a correlation between GLD and IAU’s combined assets and gold price lows?

The chart below plots the price of gold against the combined total tons of gold held by GLD and IAU.

In times past, there’s been a high correlation between gold assets and gold price lows.

However, since early this year gold ETF assets have been declining without letup.

Almost every week/month has seen a new low.

Sure, when viewed in hindsight the actual gold asset low may mark a gold bottom, but unfortunately hindsight isn’t an investment strategy.

There hasn’t been a gold bear market in well over a decade. We don’t have any bear market gold ETF data, so at this point guessing how much more money investors will yank out of gold ETFs is tougher than identifying solid support for gold.

Based on the COT report and gold asset data, sentiment is bearish enough for a bounce, but we are still lacking the tell-tale sign of a lasting bottom.

This tell-tale sign accompanied all gold market lows since 2005 (see chart).

An enlarged chart and full explanation of this tell-tale sign is available here:

The Missing Tell Tale Sign of a Lasting Gold Market Low

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (stocks, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. We are accountable for our work, because we track every recommendation (see track record below).

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.