EDITOR: | December 4th, 2013

Precious Metals at a Crossroads: Sword of Damocles or Golden Sunrise?

| December 04, 2013 | No Comments
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At this writing, miners and metals seem to be suffering their 19th nervous breakdown, a process which began back in mid-2011 and has intensified on several occasions this year. In April, prices broke sharply and in late June, set what seemed at the time – and may well turn out to be – a major area low, if not a specific price point.

As the next 4 charts show, things look pretty dismal. For simplicity we’re using as examples, a gold and a silver trading vehicle (NYSE: GLD) SPDR Gold Trust Shares and the (NYSE: SLV) iShares Silver Trust respectively. Not surprisingly their chart behavior looks similar, due to a 90% price directional correlation. Both are now close to printing new lows for the move down from 2011.

GLD Weekly

GLD Weekly

 

SLV Weekly

SLV Weekly

Looking at a gold and a silver miner ETP, (NYSE: GDX) Market Vectors Gold Miners, and (NYSE: SIL) Global X Silver Miners respectively, shows that these composites have actually registered a new low from 2011.

GDX Weekly

GDX Weekly

 

SIL Weekly

SIL Weekly

So where do we go from here?  Will it be:

A Sword of Damocles? If this fate awaits investors long the sector, and the horse hair strand holding the sword breaks, then a new down leg could commence with considerably lower mining shares prices in the offing. And expect that even more market participants will sell their shriveled holdings “at the market” and flee, most likely never to return.

Or a Golden/Silver Sunrise?  An alternate, though minority view is also possible. What if, after the metals and miners make new lows, they turn around and head back up, perhaps in an even stronger (and more sustained) way than in July?  In that situation, just a few weeks later many mining stocks had managed to double in price.

This writer certainly has an opinion, which I will share with you later, but in any event, the only entity whose view really matters – Mr. Market him/herself – should let us know shortly.

As I see it, there are two choices. If you subscribe to the view that precious metals are in an entrenched bear market, never to rise again (anytime soon), it may be best to just cash in your (remaining) chips and chase the DOW, buy some farmland, or even splurge on a few Bitcoins. Regardless of what happens to the metals and miners, it is almost a certainty that you will not be coming back to this market.  And there is nothing wrong with that if, after reflection, this seems like a good fit. Over time, ones’ actions MUST be aligned with a similar philosophy/belief structure, or life isn’t going to be much fun – or profitable. In doing so, you will be getting out because you are unwilling to accept information risk (meaning a lack of information) – and of course the fear of losing still more money.

The other choice is to stay in the market, decide how much (more) you are willing to risk, trade out the dogs you think will no longer hunt, and place the remaining funds into companies thought to be “best of breed”. If/when metals’ prices recover, these stocks should be among the first to increase in value.  In this case, staying in indicates that you have decided to accept (the lack of) information risk, for what you believe will be a relatively low price risk – buying when stocks are “cheap” rather than after a big rise.

As the SAS motto states, “Who Dares, Wins!” If staying and playing in this environment aligns with a belief that the gold and silver bull market, not unlike that of the late 1970’s, is near a major low and can either turn on a dime, or keep basing – “the longer the base the greater the upside case” – then you may, depending on your temperament, resources and pain tolerance, decide to do some or all of the following:

Buy, on a scale down basis, more of your “chosen few” into price weakness like we’ve seen so far this week.

Sell any “left for dead” miners/explorers and redeploy those funds into perceived “survivors” – on lower prices.

Consider a leveraged (not margined!) 2x or 3x ETP/ETF play such as NUGT, AGQ, DGP, or USLV.

Then follow professional commodity trader Stanley Kroll’s dictum: “Be right, and Sit tight!”

If you must stare each day at the screen, watch for a possible one or two day “island reversal” price change. The price of a metal, miner or ETP may gap down (some did this on December 3) leaving a space on the way where no trading took place. The price may then trade another day in that same area, and on the third day or so, “gap” back up, leaving an “island” where no trading in either direction takes place.

Validation will occur IF the gaps below are not filled and prices continue to move upside and away from the island. In a market with good liquidity, this formation is not common, but when it occurs, it can offer an important clue to the chartist, who as Dr. Alexander Elder says “is following the tracks of the bulls and bears.”

Finally, keep some funds in case prices collapse into a 2008-style inferno, wherein you might be able to buy your favorites for literally, cents on the dollar. What follows (Disclaimer, I own some of these) are meant to be examples, not recommendations, of stocks printing lows in 2008, then running to their respective 2011 tops less than 3 years later:

Alexco Resources (0.43 – $10.25); Endeavour Silver (0.71 – $13.00); First Majestic Silver (0.67 – $20.80); Avino Silver (0.20 to $3.60); Silver Wheaton ($2.55 – $47.50); Goldcorp ($13.80 – $56.20); Yamana ($3.31 – $20.50). And DOZENS more, which did the same thing…

Here’s my all-time favorite, mostly because I actually saw this trade on the screen in real time…Nova Gold (0.37 – $16.90). I had owned it the year before but did not buy it back that day.

Nova Gold 10 yr. chart

Nova Gold 10 yr. chart

One could list all sorts of presumably valid reasons why either a Sword of Damocles or a Golden/Silver Sunrise moment is in play. Of course no one really knows the answer until IT happens. But my sense is that we will soon find out, perhaps within a few days, almost certainly before the end of the month. Until then we can be guided by the words of one of my favorite philosophers, the late Moe Howard.  Said he perceptively, “We shall see what we shall see!”


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