I was working in the metals business for over 10 years and experienced cyclical downturns. I have shares in both gold and silver companies in my portfolio and was wondering what your opinion was on the recent plunge in gold and silver prices. I have recently averaged down on some of the stocks that I feel are now on "sale". I look forward to your comments.
I share your pain when it comes to the retreat of precious metals stocks. The fundamental cause of the decline in the sector has been the relentless selling pressure that has engulfed gold and silver prices since the highs hit in 2011. An examination of the charts will identify where we might expect some support and how best to manage investments in precious metals.
The three-year chart for gold has a number of interesting patterns worth mentioning. The double top that formed in the August to September period of 2011 indicated that the established uptrend was at risk of a reversal. After pulling back from the highs, gold caught a bounce off of support at $1,550.00 in July of 2012 and ran to its 52-week high of $1,798.20 on Oct. 5, 2012. From there it has been a story of aggressive selling driving prices below support levels for the last eight months. In addition, a death cross formed in late February of 2013 and any attempt to move higher has met resistance along the 50-day moving average.
The six-month chart for gold is not providing much evidence that a reversal of the established downtrend is at hand. The MACD and the RSI are signalling that sellers are still in control of the market.
The six-month chart for silver (much like the six-month chart for gold) is bereft of positive signals. There is an established downtrend line, a death cross that formed in late February, and no indications from the MACD or the RSI that a buy would be prudent at this time.
The three-year chart for silver exhibits the same patterns as the three-year chart for gold. A move off support at $27.50 in August of 2012 to a 52-week high of $35.44 on Oct. 1, 2012, followed by aggressive selling. The best case scenario in this instance could be a bounce off support in the $18.00 range.
Gold and silver have yet to hold support and until they do you shouldn't expect a reversal of the current downtrend. We are coming into a period of seasonal strength for precious metals that starts in July which could set up a trade but don't expect a return to the 2011 highs in the near term.
Make it a profitable day and happy capitalism!
Have your own question for Lou? Send it in to firstname.lastname@example.org.