A Gold Trader's "Deadly" Mistake

12/29/2011 8:05 am EST

Focus: COMMODITIES

Following the hype and trading with the herd is the fastest way to wind up on the wrong side of the gold market, writes Gary Tanashian, laying out a game plan and upcoming price targets to watch.

Held captive by the low-volume holiday week, gold investors look as if they will get dunked again upon the US market open today. There are a few different potential scenarios in play with regard to the gold stocks, but gold itself has been pretty clear since the momentum-fueled “channel buster” up last summer.

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Gold never, ever, sustains moves like that. You can call it some evil cabal manipulating the price of gold, or you can chalk it up to well-coordinated intervention on the part of global central banks. But the reality is that people panicked into gold in knee-jerk fashion in response to media hype as the European Union threatened to fall apart. 

Is Europe all fixed now, or did gold just get ridiculously overbought while being touted by the most perma-bull gold bugs every step of the way? My money is on the latter.

Sentiment is becoming very depressive, even among die-hard gold bugs, but it helps to remember that in the markets, especially those negatively managed by powerful authorities, equal and opposite reactions often come about in response to certain actions. Like, say, a world full of panicked financial refugees plowing into a would-be golden financial idol for a brief and shining moment last summer.

Nouriel Roubini (and his gold bug taunts on Twitter) is a figurative circus clown, a side show. Dennis Gartman speaks from on high and looks to have made a good call. These are the media stars. 

Really, though, anyone with eyes should have seen gold's fate as far back as late summer. My target (in Sept.) was low-to-mid $1600's to $1550. Now, a potential (nothing is a given in these markets) new one is projected to around $1450. 

The superstars can have the dynamic headlines, but the name of the game is to have game plans open and subject to refinement…at all times.

The current game plan has now opened up a gold target of $1450. This seems bearish, but for someone who has been onboard this bull run since 2002, it is a yawner. When things get really bullish—and I am talking about quality gold mining stocks more than gold (the simple monetary 'value' barometer)—the question will be, “Who is available to capitalize?”

I guess what this post is trying to say is that when trading precious metals, following the leaders (and their 24/7 bull horns) and going with the herd is deadly because it can leave one without opportunity capital. 

In the precious metals, when the real opportunities come, they come in dynamic fashion and they come with a heaping dose of pain for those on the wrong side of the trade—usually the herd.

By Gary Tanashian of BiiWii.com

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