Damn the Torpedoes: Buy Gold and Silver
04/26/2012 8:30 am EST
After looking at the ten-year charts on gold and silver, we're in a great place to buy if you're patient, writes Curtis Hesler of Professional Timing Service.
Gold investors, it’s time to buckle up. There might be a little more to this correction, but patience is what is needed now. The next up leg is close...and once prices begin to rise, the bargains will be left behind.
The great market crash of 2008 brought gold lower. However, in the grand scheme of things, the extent of that decline was an anomaly. It produced the best bargain in bullion that you will see in this cycle.
More important is the fact that gold recovered, and is now significantly beyond its 2007 high, while the popular stock market averages have struggled to get even.
Currently, gold is hovering at its long-term moving average, but a 3% dip would put bullion down to about $1,600. Of course, there is no reason gold might not violate the standard and dip lower, but gold at $1,550 is a terrible long shot at this point.
In a nutshell, anything under $1,600 is a reason to be enthusiastic about further purchases, and $1,550 is an opportunity to “back up the truck.”
Consider the time that gold has been in this consolidation/correction phase. The $1,900 highs were set last September, and progress has been sideways in bullion since. The current pattern and time frame is similar to what happened in 2006. After a high at the $700 level, there was a two-step correction followed by a test of the moving average, similar to what we have seen with recent price action.
Another element warning us that prices are about to accelerate higher is the recent Commitment Of Traders report. The commercials (those who are typically net short as they sell their production into the futures market) have pared their short positions back dramatically.
Meanwhile, the speculators (who tend to mirror prevalant emotions and the current trend) have become overly bearish. They have reduced their net long positions as low as we have seen for a long time. The commercials/producers know what they are doing, and have reduced their selling while they prepare for the next price advance. The attitude of the speculators, on the other hand, is an ideal contrary indicator.
Overall, the current correction is not unprecedented, and time is running out before gold makes its next move to new highs. If the past even rhymes, we should see gold advance to $2,500 to $3,000 in the next leg. It would be best to use weakness now to invest for that future rather than waiting for new highs and then joining the crowd in chasing prices higher.
If you feel fully invested in metals at this point, persevere and be patient. Seasonally, gold usually firms up in the spring and then accelerates in the summer.
The most conservative approach at this point is to invest in bullion gold. The easy way to do that is to purchase Central Gold Trust (GTU).Our downside buy price has been $65 for some time, and that remains unchanged. I believe that is the maximum you should pay at this time, and any accumulation under $65 is warranted.
If you are looking for a deeper bid, there is support at $60. You could try an open buy order at that level. It’s a low-probability bid, but gold is volatile, and you might get lucky.
Silver is going to rise with gold. But again, gold bullion is the more conservative approach. In this light, Central Fund of Canada (CEF) holds approximately a 50/50 split between gold and silver bullion. If you are looking at adding some silver to your mix, CEF is my choice.
CEF is selling close to our original purchase price of $21.38, which we accomplished by scaling in during weakness last fall. There is very strong support at $20, but that is a long shot from here. Nevertheless, silver is volatile; and if you had an open order in at that level, you just might get a fill on a sudden surprise break. I will leave that gamble up to you. The important thing is to limit your purchases at $22 or less.
These are both real closed-end mutual funds where actual gold and silver bullion is held in trust for the stockholders. These are not ETFs, and thus are much safer. They are also taxed as stocks rather than taxed unfavorably, as are commodities and commodity ETFs.