How to Trade Gold, Silver Now

11/21/2011 11:55 am EST

Focus: COMMODITIES

Look for a strong dollar to put continued downward pressure on commodities like gold and silver in the short term, but a major tipping point could lie ahead that would spur a renewed bullish move for the metals.

Over the past couple months, the precious metal charts have made some sizable moves. Most investors and traders were caught off guard by the sharp, avalanche-type selloff and lost a lot of hard-earned capital in just a few trading sessions. Gold dropped over 20% and silver a whopping 40%.

The crazy thing about all this is that these types of moves in precious metals can be avoided and even taken advantage of in certain situations. There is no reason for anyone to continue holding on to those positions after they pull back 6% of more because of the type of price and volume action both gold and silver had been displaying in the past few sessions.

I warned readers this past summer that precious metals were about to top any day and that either protective stops should be tightened or taking profits was also a smart move. It was only two trading sessions later that precious metals topped and went into a freefall.

A couple weeks later, once precious metals had found support and the uneducated investors were licking their wounds, wondering what the heck just happened to their trading accounts, I put out another report, but this time with a bullish outlook.

Silver was then trading at $29.96 and I had a $35-$36 price target over the next two months. Gold was trading down at $1611 and I saw it heading back up to $1750-$1775 area before finding resistance and pulling back. Both these forecasts were reached over the next two months.

With all that said, what exactly are the charts saying right now?

Current Precious Metals Charts Summary

For the past six weeks, we have been watching both gold and silver struggle to hold up, but they have managed to grind their way to my price targets. After reaching those targets a couple weeks ago, sellers have stepped back into the precious metals market and put pressure on these metals.

Last week, gold and silver started to pull back in a big way amid rising volume. This could just be the start of something much larger, which I will cover in just a moment.

The wild card for precious metals, and for every stock and commodity, for that matter, is Europe. Every other day there seems to be headline news moving the market, and most of takes place in overnight trading for those of us living in North America. It’s this wild card which is keeping me from getting aggressive in the market right now.

Let’s now take a look at the charts for silver and gold.

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Silver Futures Chart

Silver is currently in a downtrend and may be starting another leg down this week. Long term, I am bullish, but for the next couple months, I am remaining neutral to bearish for silver until it forms a base from which to start a new uptrend.

chart
Click to Enlarge

I am currently neutral/bearish on gold as well. If it can trade sideways for a few weeks, then I will become bullish.

Gold Futures Chart

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Click to Enlarge

In short, I feel there is a good chance the US dollar will continue higher, and if that happens, we should see strong selling in North American equities, commodities, and likely the precious metals charts as well.

Financial markets around the world are at a tipping point, meaning something really big is about to take place. The question is which way investments will move. The only thing we can do is trade with the current trends, price patterns, and volume.

At this time, I still see a higher dollar, which means lower stocks and commodities. This could change at the drop of a hat depending on the news that comes out of Europe, so the key to trading right now is to remain cash rich and take only small positions in the market.

By Chris Vermeulen of The Gold and Oil Guy

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