Since silver and gold topped in 2011 investors have been struggling with these positions, hoping this cyclical bull market for metals continues. The simple truth is, no one knows for sure if prices will continue to make new highs, and those who say otherwise are wrong.
All investments move in cycles, waves, or trends -- whichever you want to call it. The market has four simple yet distinct stages and each one requires a completely different skill set and trading tactic to navigate.
– After a period of decline, a stock consolidates at a contracted price range as buyers step into the market and fight for control over the exhausted sellers. Price action is neutral as sellers exit their positions and buyers begin to accumulate the stock.
– Upon gaining control of price movement, buyers overwhelm sellers and a stock enters a period of higher highs and higher lows. A bull market begins and the path of least resistance is higher. Traders should aggressively trade the long side, taking advantage of any pullback or dips in the stock’s price.
– After a prolonged increase in share price the buyers now become exhausted and the sellers again move in. This period of consolidation and distribution produces neutral price action and precedes a decline in the stock’s price.
– When the lows of Stage 3 are breached, a stock enters a decline as sellers overwhelm buyers. A pattern of lower highs and lower lows emerges as a stock enters a bear market. A well-positioned trader would be aggressively trading the short side and taking advantage of the often quick declines in the stock’s price. More times than not all of Stage 2 gains are given back in a short period of time.
Now that you know the stages and what they look like, it's time to review the gold, silver, and miner charts.
Gold Chart – Weekly
Gold has been in a bull market for several years but is starting to show its age in terms of the size of the price patterns, volume levels, and extreme bullish sentiment. Back in 2011 a week before price topped my firm exited precious metals because the short term charts and volume levels were warning of a sharp drop. Since then I have not done many trades in either gold or silver because I do not like shorting in bull markets. Waiting for a bullish setup/price pattern before getting involved is my focus.
Gold has pulled back with a bullish 5 wave correction the last five months and is at key support. While the long term charts are pointing to higher gold prices, you must be aware that if gold and silver start to break down, things will likely get ugly quickly. To be honest I do not care which way it goes, I just want it to either rally from support here and make new highs or break down and crash. Both will be very profitable if traded properly.
Silver Chart – Weekly
Silver has a very similar chart to that of its big sister (yellow gold). This shiny metal has the energy of a 3-year-old, making it a very volatile investment. I have touched on the topic of gold and silver being so-called "safe havens," and if you have been reading my work for a while you know that any investment that can move 18-45% in value within one month is certainly not
a safe haven.
While it has done well in the past decade and boosted a lot of retirement accounts, the day will come when these things collapse, and most people holding them will give back most if not all the gains they had simply because people get attached to large positions and most do not know when to just exit a position.
Gold Miners Chart – Monthly
This chart gives me cold sweats because I know how many people own gold mining stocks and I know how fast these things can move. If the price closes below the green support line, the bottom could fall out and be very painful for those who get paralyzed by denial and do nothing but watch their accounts lose value week after week.
Precious Metals Investing Conclusion
In short, this report is to show you the very basics of how investments move in stages. It is also to offer a warning that precious metals are technically very close to a major breakdown, which the big money players are watching closely. This thinly traded sector can move extremely fast when everyone rushes for the door.
Don't get me wrong -- I am not saying a crash is about to happen, actually it’s the opposite. All I'm doing is planting the idea in your subconscious so that if prices continue to move lower you will take action with your investments. Keep in mind that you can always buy the investment back at any time again if the outlook changes in a week, month, or year.
(See also: Debt-Free Junior Producer Discovers Gold Near Arizona's Most Productive Mine
and Are Correlations Between Currencies and Precious Metals Returning to Normalcy?
Editor's Note: Chris Vermeulen offers more content at his sites, TheGoldAndOilGuy.com and Traders Video Playbook.
No positions in stocks mentioned.
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