Two Paths for Precious Metals

By  DEC 05, 2012 3:15 PM

Precious metals have enjoyed multi-year bullish trends, which made last week's shakeout unnerving for some. MoneyShow's Tom Aspray examines the charts and offers advice on your next moves.


The tone in the precious metal markets has changed in the past week as increasing volume suggests the sellers may now be taking charge. The first sharp drop came on November 28 when over 480,000 contracts changed hands as gold lost 2%. This reversed some of the positive momentum from the previous Friday when the February gold futures closed at their highest level since mid-October.

Another wave of selling hit the futures early Tuesday morning when global trading was extremely thin. The futures lost $10 in a minute and over 3,000 contracts traded at 12:47 a.m. ET as the February futures contract cracked the $1,700 level.

This occurred when even the US and European traders were mostly absent. Another wave of selling hit the market as the US market opened Tuesday with the February contract dropping 1.5% to close at $1,695.80.

Some are assuming that Tuesday’s drop was tied to a large bearish option trade last week and those buyers picked a particularly thin period of trading to move the markets in their favor. Others think that the selling was tied to fears over the fiscal cliff as traders took profits now to avoid what may be higher taxes on their profits next year.

Whatever the reasons, the high-volume selling needs to be respected as it increases the chances that gold and silver will test, if not break, below their November lows. A technical look at gold, silver, and the silver mining stocks outlines the two most likely paths for the metals this month.

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Chart Analysis: The close Tuesday in the gold futures was below the last two swing lows at $1,707 basis on the February contract. This now represents the first level of resistance, and it has been tested early Wednesday.

The Spyder Gold Trust (NYSEARCA:GLD) closed at $169.61 on November 23, which was just above the 61.8% Fibonacci retracement resistance from the October highs. Two days later, GLD gapped below its 20-day EMA and it gapped lower again on Tuesday.

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The iShares Silver Trust (NYSEARCA:SLV) peaked last week at $33.31 and made a high in early October at $34.08. This was very close to the major 38.2% Fibonacci retracement resistance at $34.11 that goes back to the 2011 high.

The Global X Silver Miners (NYSEARCA:SIL) dropped back to test its flat 200-day MA in November, and it is now at $21.45. The 50% Fibonacci retracement support from the July low of $16.85 is at $21.10.

What It Means: Though it is possible that gold’s recent drop is just a false break, the technical action makes a further decline the most likely scenario or path in the weeks ahead. Gold and the gold ETFs are likely to test and probably break the November lows.

The iShares Silver Trust is also likely to drop back to the recent lows, while the Global X Silver Miners is acting a bit better.

The second likely path for GLD and SLV is that they will not decline much further over the near term and then resume their uptrend in the next week or so. The major trend for gold is still positive, so a deeper correction should be followed by higher prices in 2013.

So what is an investor or trader to do? Though a one to two day bounce is possible, the recent failed buy signals should not be ignored as they favor a further decline. Therefore now is the time to take some profits on original longs and use recently tightened stops on the remaining position. Those who bought later should limit their exposure now.

How to Profit: See below for managing your positions.

Portfolio Update: For investors 50% long the SPDR Gold Trust at $152.42 and 50% long at $150.28, close out half the position now, and use a stop on the remaining position at $160.90.

Investors should be long multiple positions in the iShares Gold Trust (NYSEARCA:IAU) from $15.68 to $15.42. Close out half now, and use a stop on the remaining position at $16.16.

Late buyers 50% long the iShares Gold Trust at $16.56 and 50% long at $16.34, for an average price of about $16.45, close out half now, and use a stop at $16.16 on the remaining position.

You should now be 50% long the iShares Silver Trust at $30.90 and 50% long at $30.34. Close out half now, and use a stop on the remaining position at $30.85.

For Global X Silver Miners, you should be 50% long at $23.14 and 50% long at $22.48. Sell half now, and use a stop at $21.48 on the remaining position.

Editor's Note: This article was written by Tom Aspray of MoneyShow.

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No positions in stocks mentioned.

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