Gold And Silver: The Final Capitulation Commences

Background

The first 10 years of the bull market in gold was in hindsight plain sailing allowing us to generate profits by sticking with the trend. Alas, all bull markets come to an end and so it did in 2011 when gold peaked at $1900/oz. Silver, despite having numerous industrial uses also felt the draft and fell dramatically along with the mining sector which lost approximately 70% of its value during a 3 year period of pure carnage.

This pattern of falling stock prices interrupted by sudden price hikes has characterized the precious metals sector for the last three years or so. Unfortunately the bounces were rarely of the same magnitude of the preceding falls in prices and so we have witnessed the Gold Bugs Index, the HUI, fall from a high of 630 to a close today of 113, recording a drop of some 80% in the value of these stocks. 

Pros and Cons

The argument for owning precious metals includes, but is not limited to, some of the following; physical demand, money printing, the fear trade, insurance, longevity, various data points, metrics and ratios. We can agree that most of these criteria suggest a stronger more robust precious metals sector and collectively they should boost prices considerably.

The argument against owning precious metals is that despite all of the above this sector has suffered badly and is still suffering. The trend is your friend as they say and the trend here is one of heading south for the last 3 years. Bear markets usually end with a severe sell-off, just like a bull market ends with a final spike upwards. The slow grind south has looked more like ‘death by a thousand cuts’ rather than a final capitulation which has been missing all along. The last few days may have changed all that as we can see that the precious metals sector is taking a real pounding.

Cash is King

The US Dollar is outperforming gold, silver and their associated mining companies just as it did in 2014 and 2013 as the pictures clearly indicate in a previous article entitled; 2014: Cash beats gold, silver and HUI

Charts

Taking a quick look at the charts for Gold, Silver, and the HUI we see a very sorry picture indeed as oppose to that of the US Dollar which has gained almost 20% in the last 12 months.

Conclusion

To implement an aggressive acquisitions programme at this time is to jump the gun as we have no evidence that the bottom is in. Gold has now pierced its November 2014 lows, silver has done the same and the Gold Bugs Index, the HUI, has penetrated its 2008 low of 150. Support levels are quickly evaporating as the carnage in this sector continues to savage the longs.

Predictions

Our price targets for the immediate future are as follows;

Gold Target $1000/oz

Silver Target $12.00/oz

HUI Target 100

As for timing we expect these targets to be hit by the end of the year.

Recommendation

Build cash in order to maximize the opportunities that lay ahead of us. Be patient as some perma-bulls in this sector will tell you that now is the time to buy, it isn’t.  

Consider acquiring DUST.

Dust is a Direxion Shares Exchange Traded Fund Trust (NYSEARCA: DUST) Gold Miners Bear 3X ETF. What this means is that for every 1% that the mining stocks fall DUST will gain that percentage move approximately times three over. So we can see that this is a highly levered vehicle which can accelerate and decelerate quickly.

For disclosure purposes we do own this ETF.

We currently retain 70% of our funds in dollars and are glad we do so as they have strengthened considerably which should enable us to purchase more stocks and or gold and silver when the bargains present themselves.

Stay flexible and consider the occasional short trade as and when the market is overbought. These trades may take time to eventuate, but when the outlook in the short term is grim the risk/reward environment is favourable.

Finally, go gently and only deploy small amounts of capital until a new direction is confirmed, we all need to be able to take a hit and live to fight another day.

Got a comment, then please fire it in whether you agree with us or not, as the more diverse comments we get the more balance we will have in this debate and hopefully our trading decisions will be better informed and more profitable.

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