Mining Stocks and Their Implications For Precious Metals

gold miner pickPrzemyslaw Radomski, CFA: In our essay on gold price in November we examined the long- and the-short-term outlook for gold to check whether it confirm the indications for silver and mining stocks or not. As we wrote in the summary:

(…) the medium-term outlook for gold remains bearish and, at this time, the short-term outlook is bearish as well. It seems that the precious metals sector reversed direction this week right after moving to the declining resistance lines. (…) From this point of view, it might be the case that the next major downleg has already begun and it seems likely that we will see at least a short-term downswing shortly.

Since that essay was published, gold dropped below $1,340 and almost reached an important support level at $1,300. The yellow metal has lost about 3% since Oct. 28 and has logged its longest losing run since mid-May when it dropped 8% in seven days. Additionally, we also saw drops in case of silver and mining stocks.

From today’s point of view we see that this decline was triggered (as it was likely to happen anyway, based on technical reasons) by doubts over when the U.S. Federal Reserve would begin scaling back its stimulus measures. Although the Fed left its $85-billion-a-month asset purchase program in place following its monthly policy meeting, it didn’t give clear indication whether it would start scaling back stimulus at the December meeting or continue it into the start of 2014.

Therefore, investors still look out for U.S. data reports to gauge if they will strengthen or weaken the case for the Fed to reduce its bond purchases. As is well known, if you want to be an effective and profitable investor, you should look at the situation from different angles and make sure that the actions that you are about to take are justified based on each of them, or at least based on a majority of them. That’s why in today’s essay we examine the Euro Index and the HUI Index (along with its performance relative to gold) to see if there’s anything on the horizon that could drive the precious metals market higher or lower. We’ll start with the Euro Index chart (charts courtesy by http://stockcharts.com).

Euro Index chart - XEU

Looking at the above chart we see that the long-term downtrend remains in place. Additionally, it seems that the short-term uptrend might already be over. In the previous week, the RSI bounced off the 70 level, which was a bearish sign. At the same time the Euro Index moved very close to the strong resistance created by the declining resistance line, but it didn’t break above it. This show of weakness in combination with the position of the RSI triggered a heavy decline and the European currency dropped below the 135 level. Earlier this week, the euro extended declines and it seems that the downward move is not limited at the moment.

At this point, we would like to emphasize one important fact: the previous tops (in 2008 and then in 2011) were followed by major declines in the precious metals sector. If history repeats itself we may see similar price action in this situation.

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