Although folks are feeling intimidated because of the sharp correction in gold, from a longer-term perspective, bullion has hardly crashed and burned, writes Curtis Hesler of Professional Timing Service.
This is a good time to step back and take a look at the forest. Dealing with the short-term volatility we have been through in all the markets last month can fuzz your focus, and lead to false conclusions and mistakes.
Contrarily, gold is simply correcting. You were warned last month that prices would be coming down. As I told you: “Do not panic. It is a correction only; but as in the past corrections, the press will be all over the media with stories that the top is in. Unless you figure that the global debt problems are solved and that politics has found religion, the top is not in.” I can’t add much to that sentiment.
Prices have come off a bit quicker than I expected. However, there is very good support at the $1,550 level (as anticipated). There has been a spillover in selling, as a general panic to raise cash overwhelmed all of the markets during September.
The result has been an opportunity to accumulate precious metals positions and add Central Fund of Canada (CEF) and Silver Wheaton (SLW) to our recommended list.
Both of these are bullion-related plays. Central Fund of Canada holds an approximate 50/50 position in both gold and silver bullion. It is a closed-end fund—not an ETF—which offers investors direct ownership in the bullion that is held physically for the stockholders. This will not be the case with an ETF.
We recommend accumulating CEF up to $22, which is our downside buy price—or in this case, since the stock is trading under that level, it is the maximum you should pay.
Current high volatility offers the prospect for somewhat lower prices near term. If you have open orders in under the market, you just might snag some of our recommended issues even lower than they are currently. I like to refer to this as entering “stink bids,” but sometimes if you are there ahead of the crowd, their panic can provide you with some extraordinary buys.
If you would like a stink bid for CEF, you might try some at $18.50. Let me remind you, the stink bids are by nature unlikely to be filled. On the other hand, they just might. If they are, you will be very fortunate.
Another approach that will allow you to take advantage of selling panics is to scale in your purchases. First, decide what amount of money you are going to put into the purchase and then buy a portion—I like to buy one-third to one-half initially at or below our recommended price. Then scale in with additional purchases at successively lower prices.
If you have the skills to identify support levels, use them, or use a percentage—say, at 10% drops below your initial purchase. Normally, I will target two additional purchases using one-half of the remaining money at each buy level.
For example, if you were to put $10,000 into a position, you should buy $5,000 at the initial price, then $2,500 at 10% lower, and the remaining $2,500 at 10% below that.
Scaling in can help overcome the fear you will have when buying into weakness. If you are truly afraid to make purchases as the market is falling, you might also consider that perhaps you are investing too much and cut back your purchases.
It is better to have even a small position rather than none at all when the next up leg gets under way. In that light, it is much better to invest in the metals now, when they are weak, rather than waiting until gold breaks over $2,000 and becoming a panic buyer.
Investing on the basis of your emotions is a very poor investment model. You need to be buying when others fear and fear when others are confident.
In the line of bullion investments, Central Gold Trust (GTU) has not come off to our posted downside buy price of $57.50. I am going to raise the buy price to $60. The gold market is getting oversold, but I expect to see some positive divergences develop before the next rally sets in. If you are of a mind to scale in, a fantastic “stink bid” for GTU is $55.
Central Gold trust is a closed-end fund—not an ETF—and it is the sister company to Central Fund of Canada. However, GTU holds only gold—no silver.
Another of our non-mining company precious metal recommendations is Silver Wheaton (SLW). We sold SLW in May for $37.25. Our buy back price was $31, and the stock has been trading near that for the last week or so.
Those who wished to reclaim their position should have done so by now. If you sold and bought back at our official prices, you enjoy a 16.7% advantage now, which goes a long way to offsetting the risk we saw last spring due to SLW’s comparative weakness.
At $31 or less, Silver Wheaton is an excellent pure play on silver. If you would like a deeper target price, you can try an open order at $25. However, I don’t expect to see the metals much weaker than we have seen already.
A final recommendation on our list that is a more direct play on precious metals prices is Royal Gold (RGLD). Our downside buy price of $56 is a bit far away, and I am raising it to $60. If you want a low probability but very attractive “stink bid” for RGLD, you might sneak an open order in at $55…but again, any purchases at $60 or better will look pretty good once gold gets revved up again.
Bullion buyers, I am surprised that gold actually broke to $1,550. It was a bit of a stealthy break, though, as it occurred in overnight trading and was all but impossible to take advantage of in the bullion market.
There has not been a real opportunity to take advantage of bullion under $1,600, but we may still see some backing and filling as well as a possible “test” of the low set at $1,535 on September 26.
Although gold has attained its ultimate downside objective at $1,550, I would expect more time in this correction before it is over. All market moves have to be considered in both time and distance. The distance has been met in this case, but my time expectation has not.
On a seasonal basis, gold usually marks time during October and sometimes into November before making a strong up move into the first quarter of the new year. I expect to see this pattern unfold as usual this year with a low finally completed over the next few weeks.
You should be using further weakness to accumulate in anticipation of the next rally, which I expect will extend to $2,000 during the first quarter of 2012.
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