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business newsFinally Time for Caution in Precious Metals
Silver climbing through the charts means an ideal time for taking profit, meanwhile some quality base metals and miners are oversold.
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At the end of July I called an important buy point in precious metals. See Are Gold, Silver Offering More Buy Signals?
In these articles I mentioned a target of $21 by the end of the year. Silver has already reached that target after making an explosive move higher -- a 15% gain in five weeks. I've found that having targets and taking profits at overbought conditions is crucial in a trading strategy. As a trader, it's of primary importance to understand long-term trends and in a bull market to add to positions when they're on sale and take profits when it's receiving a premium. Using oscillators to determine warning signals to buy and sell are extremely helpful but need to be used carefully. Breakouts can lead a momentum indicator to stay at an extreme ratio for an extended period of time, which is the case for silver and gold at the moment.
Using momentum indicators forces me to prepare for a correction or prevents me from buying into a frenzy when a stock is overextended. These indicators help me to trade against the market herd, and become contrary at extreme buying frenzies. Many contrarians make calls too early as irrational markets tend to stay irrational too long for most investors to stay in them. Nevertheless, when used in conjunction with other technical tools it can provide excellent market entry points that are high-reward and low-risk when structured correctly.
The best way to play this market is to buy gold and silver when it hits the support trend line and is oversold, and take profits as it approaches the rising resistance line.
Silver’s move has been parabolic and is very overbought. A healthy correction or sideways consolidation may be coming to provide an opportunity to work off this rise and pull back to support. It has had five up weeks with a 15% gain from my buy signal at $18.30. It's also been overbought for an extended period, so to sustain this rise without a correction is highly unlikely. To enter at this point wouldn't be prudent according to my strategies. Instead there are some miners who are coming out with great news that are oversold at the moment. I believe these miners will outperform even if bullion corrects. Mergers and acquisitions are increasing with the recent purchases of Andean Resources by Goldcorp outbidding Eldorado Gold (EGO), Kinross (KGC) buying Redback, and Continental Minerals being bought out by Jinchuan Group. A weak dollar combined with emerging-market growth will cause more overseas interest in buying natural resources. Base metals have been performing very strong. There have also been some recent breakouts in some uranium and molybdenum plays. Most of the gold and silver miners I follow have resources with low cash costs and are close to infrastructure. A lower gold and silver price won't impact these miners as much as other miners with higher cost projects.
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