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The Precious Metals Correction

As we are now of the opinion that the US dollar may spend some time going sideways, or perhaps even making some gains, we also now think that precious metals are going to take a significant drop.

Gold Chart 240408

We know we may sound a bit like a broken record, but gold is still too far above its 200 day moving average! This gap must be closed, and we think that closure will happen within the next couple of months. That means a $100 haircut for gold, which will hit gold stocks hard and also drag the silver price south.

Silver Chart 240408

Silver is encountering resistance just below $19 and although we are seeing some support at $17, we feel that silver will break that support in the near future. When silver prices drop, they fall hard and fast and we will probably see silver fall very quickly to the 200dma level.

If we are to see a drop in silver and gold prices, then it follows that gold and silver stocks should also correct.

HUI Chart 240408

The HUI, and even individual gold and silver stocks, have failed to provide decent leverage in this recent run up in gold prices. Technically speaking, they are actually in a healthier position than the metal itself. The HUI is basically on its 200 day moving average line and many gold and silver stocks do not have much of a gap between their price and their 200dma.
However if we get a $100, or even just a $50 drop in gold prices, we suspect that gold and silver stocks will be significantly sold off even if they do not look too overbought at the moment.

AEM Chart 240408

For example, Agnico Eagle is currently resting on a short term support line at around $64. If it breaks that line the next support could be found around the 200dma but the real danger lies in if these stocks breakdown through that level.

Kinross could breakdown through this level with a correction of just over 10%.

KGC Chart 240408

An additional sell off could be sparked by a breakdown through these levels and could turn a 10% correction into a 20% drop or possibly more. One thing is certain: volatility in the market is not on the decrease.

We recently took profits on Hecla Mining, selling 50% of our position at $11.79.

HL Chart 240408

Hecla hasn't fallen as much as other silver stocks recently, and so in the coming weeks we think there will be at lease a couple more dollars knocked of this stock price. Hecla is not alone though, Pan American Silver is another silver stock that could be getting set for a significant fall.

PAAS 240408

We have noticed a possible rounded top formation in PASS in particular, but many other silver stocks are also in a technically weak position. Their technical health is not as bad as silver itself, but it is weak enough to be hurt by a further drop in silver prices.

So what should we do in this situation?

Well that all depends on your personal aversion to risk and how long you intend in be invested in this market. Let us go through a few possible strategies.

If you are here for the long term, and do not want to take on much risk, then a simple strategy is to ride out these choppy waters and just sit tight holding all positions. However remember that even long term investments need an exist strategy, whether that be when gold reaches a certain price or selling percentages of your holdings all the way up to lock in profits. Buying is only half the equation, one must know when to sell as well.

Another strategy is to sell a proportion of your holdings in gold and silver to put some cash on the sidelines. This cash, which we call “opportunity cash”, can be used to buy positions after the drop and take advantage of discount prices.

The third school of thought, and probably the most risky, it to short the market. Selling short is dangerous in any market, but it is especially risky when you short something that is in a bull market. The risk increases yet again when one considers shorting something like gold, which can shoot up without warning if the geopolitical situation takes a turn for the worse or if another bank is going bust and Ben Bernanke has to come to its rescue with yet more of his rate cuts.

We have not chosen to hold through this one, as we have already started taking money off the table by significantly reducing our exposure in Silver Standard, Pan American Silver and halving our position in Kinross Gold, Yamana Gold, Agnico-Eagle and most recently, Hecla Mining.

We need to stay alert and watch the market over the coming trading sessions, especially with the coming Fed meeting which may not produce a rate cut that will have a significant negative effect on the US dollar or positive effect on gold. We are approaching the “sell in May and go away” season, but if this seasonal correction is to come to the precious metals sector, its a good idea to lock in some profits before everyone else starts heading for the door.

These are fast changing times and its essential that you stay up to date with what is going on in the market. For our latest commentary and trading signals on gold, click here to subscribe to The FREE Gold Prices Newsletter and click here for The FREE Silver Prices Newsletter.

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Reader Comments (1)

I did some research. After lossing money on that parabolic move that the metals made from October 2007 to march 2008. I should have gotten out in early March. The rule is: to go out of a parabolic trend before the control top(down ward trend). Place your puts make money on the down trend. From the top of the parabolic trend 90% of the time it will hit the 200day moving average. that is the rule dealing with a parabolic trend. I got this info from Joseph Granville. the article was published on Oct 17,2007. I think I will place a few puts at $810.00 level.

April 26, 2008 | Unregistered Commenterjerrold minyard

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