Precious metals and their related mining stocks continue to underperform the broad market, writes Chris Vermeulen of TheGoldAndOilGuy.com.
This year’s heavy volume breakdown below key support has many investors and traders spooked creating a steady stream of selling pressure for gold and silver bullion and mining stocks.
While the technical charts are telling me prices are trying to bottom, we must be willing to wait for price to provide low-risk entry points before getting involved. Precious metals are like any other investment in respect to trading and investing in them. There are times when you should be long, times to be in cash, and times to be short (benefit from falling prices). Right now and for the last 12 months when looking at precious metals, cash has been king.
Since 2011 when gold and silver started to correct, the best position has been to move to cash or to sell/write options until the next trend resumes.
In 2008, we had a similar breakdown in price washing the market clean of investors who were long precious metals. If you compare the last two breakdowns they look very similar. If price holds true, then we will see higher prices unfold at the end of 2013.
The key here is for the price to move and hold above the major resistance line. A breakout would trigger a rally in gold to $2600-$3500 per ounce. With that being said gold and silver may be starting a bear market. Depending what the price does when the major resistance zone is touched, my outlook may change from bullish to bearish. Remember, no one can predict the market with 100% accuracy and each day, week, and month that passes changes the outlook going forward.
The chart below is one I drew up on May 3. I was going to get a fresh chart and put my analysis on it but to be honest my price forecast/analysis has been spot on thus far and there is no need to update.
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Gold Daily Technical Chart Showing Bottoming Process
Major technical damage has been done to the chart of gold. Gold is trying to put in a bottom but still needs more time. I feel gold will make a new low in the coming month then bottom as drawn on the chart below.
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Silver Daily Technical Chart Showing Bottoming Process
Silver is in a similar pattern as gold. The major difference between gold and silver is that silver dropped 10% early one morning this month, which had very light volume. The fact that silver hit my $20 per ounce level and it was on light volume has me thinking silver has now bottomed.
But, silver may flounder at these prices or near the recent lows until its big sister (gold) puts in a bottom.
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Gold Mining Stocks Monthly Investing Zone Chart:
Gold mining stocks broke down a couple months ago and continue to sell off on strong volume. If precious metals continue to move lower, then mining stocks will continue their journey lower.
This updated chart, which I originally drew in February, warning of a breakdown below the green support trend lines would signal a collapse in stock prices, which is exactly what has/is taking place. While I do not try to pick bottoms (catch falling knives) I do like to watch for them so I am prepared for new positions when the time and chart turn bullish or provide a low risk probing entry point.
While I focus more on analysis, forecasts, and ETF trading another one of my trading partners who focuses on trading stocks and 3x leveraged ETFs has been cleaning up with gold miners.
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Gold, Silver, and Mining Stocks Conclusion
Precious metals continue to be trending down and while they look to be trying to bottom it is important to remember that some of the biggest percent moves take place in the last 10% of a trend. So we may be close to a bottom on the time scale but there could be sharply lower prices yet.
The time will come when another major signal forms and when it does we will be getting involved. The exciting thing is that it could be just around the corner.
By Chris Vermeulen of TheGoldAndOilGuy.com
