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Precious Metals: Keep It Simple


Trading strategies for precious metals whether the sector breaks a new low or firms.

This past weekend I had a conversation with a fund manager friend whom I admire. He lives in the Asia-Pacific region and has tremendous knowledge of and insight into markets. I asked him what his advice would be. He told me it was simple. "My advice for the next three months is patience. My advice for the next three years is precious metals." People often feel the need to complicate things by overtrading and overthinking the situation. In this piece, I want to keep it simple for gold and silver and the mining shares.

The first chart is the chart I published back in May when suggesting that a major bottom could be at hand. This weekly chart shows a rebound that may be fading yet the breadth indicator at the bottom (when smoothed) remains as oversold as it was in December and back in 2008. Note that in September 2008, the bullish percent index (four-week moving average) was at 50%. Today it stands at 14%.

The next chart from shows the HUI Gold Bugs Index (^HUI) with three different breadth indicators. I show these not to state the obvious. I've drawn circles to let you draw your own conclusions. Should gold stocks retest the low then I'll be looking at these breadth indicators for potential positive divergences which would send a strong bullish signal.

One reason I've been optimistic is because the shares have performed well amid the flaccid rebound in gold and silver. The shares always lead coming out of rebounds, so that recent action is a positive sign. However, the shares won't perform well if gold and silver don't confirm their bottoms. In fact, there is noticeable but slight deterioration in the charts.

Gold has failed to recapture its 65-week moving average which has essentially supported the entire bull market ex 2008. Meanwhile, silver has failed to recapture its 120-week moving average which provided key support in 2010 and at the end of December. All that being said, it is important to recognize that a technical breakdown would be in the context of a correction in its latter stages. Gold is nearly 20% off its high while silver is about 45% off its high. The shares have essentially been in a bear market for 18 months. In other words, the metals could break to new lows, but I wouldn't expect the lower prices incurred from a breakdown to be sustained beyond the short term.

The plan of action should be fairly simple going forward. If the metals break to new lows, one should begin buying after the breakdown. Regarding the shares, one should begin accumulation on a retest of the low. What happens if these markets firm? In that case, wait for support to be confirmed and then accumulate. It is simple but it requires constant patience. In the meantime, if one is too heavily long, one could consider hedging exposure with the inverse ETFs. In my firm's research, we continue to focus on those companies best suited to rebound quickly and prosper from the coming cyclical bull market.

Editor's Note: See more from Jordan Roy-Byrne at The Daily Gold.
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No positions in stocks mentioned.

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