Be Careful Chasing Gold and Silver, Overbought Condition Could Lead to Correction

At the end of July I published a series of articles calling an important buypoint in precious metals.  To see my archived article from that point click here

In these articles I mentioned a target of $21 by the end of the year.  Right now silver has reached that target after making an explosive move higher.  Silver has made a 15% gain in 5 weeks.  I have found having targets and taking profits at overbought conditions is crucial in a trading strategy.  As a trader it is of primary importance to understand long term trends and in a bull market to add to positions when they are on sale and take profits when it is receiving a premium.  Using oscillators to determine warning signals to buy and sell are extremely helpful but needs to be used carefully.  Breakouts could lead a momentum indicator to stay at an extreme ratio for an extended period of time which is the case for silver and gold at the moment.

Using momentum indicators forces me to prepare for a correction or prevents me from buying into a frenzy when a stock is overextended. These indicators help me to trade against the market herd, and become contrary at extreme buying frenzies.  Many contrarians make calls too early as irrational markets tend to stay irrational too long for most investors to stay in them.   Nevertheless, when used in conjunction with other technical tools it can provide excellent market entry points that are high reward and low risk when structured correctly.

The best way to play this market is to buy gold and silver when it hits the support trend line and is oversold, and take profits as it approaches the rising resistance line.

Silver’s move has been parabolic and is very overbought.  A healthy correction or sideways consolidation may be coming to provide an opportunity to work off this rise and pullback to support.  It has had 5 up weeks with a 15% gain from my buy signal at $18.30.  It has also been overbought for an extended period so to sustain this rise without a correction is highly unlikely.  To enter at this point would not be prudent according to my strategies.

Instead there are some miners who are coming out with great news that are oversold at the moment.  I believe these miners will outperform even if bullion corrects.  Mergers and acquisitions are increasing with the recent purchases of Andean Resources by Goldcorp outbidding Eldorado Gold, Kinross buying Redback, Continental Minerals being bought out by Jinchuan Group .  A weak dollar combined with emerging market growth will cause more interest from overseas to buy natural resources.  Base metals have been performing very strong.  There have been some recent breakouts in some uranium and molybdenum plays which I will be telling my premium readers about in the next couple of days.  Most of the gold and silver miners I follow have resources with low cash costs and close to infrastructure.  A lower gold and silver price will not impact these miners as much as other miners with higher cost projects.

To find out about which specific stocks I am researching go to my website at

Disclosure: I own gold and silver bullion and mining stocks.

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  1. [...] To Read The Full Article Click Here… [...]
  2. [...] On September 27th,2010 I wrote an article mentioning that uranium miners and molybdenum miners were poised for a breakout.  I wrote in the article, “There have been some recent breakouts in some uranium and molybdenum plays which I will be telling my premium readers about in the next couple of days.”  Since that article the molybdenum and uranium miners have made huge gains due to supply concerns globally.  While investors are concerned of a global currency devaluation, a global race is occurring to control molybdenum and uranium assets. The primary molybdenum miners such as Thompson Creek(TC) and General Moly(GMO) are up today on speculation that China will curb molybdenum production as they classify the metal as a natural resource.  General Moly (GMO) released their earnings today and mentioned that China remains a net importer of 5.5 million pounds year to date.  This development will have a huge impact on the global supply of molybdenum as China is the largest producer and supplier of over one third of the global supply.  These primarily molybdenum producers will receive a premium as molybdenum is usually a byproduct of copper production which is usually fixed.  Primary molybdenum producers will receive a premium for their assets as demand accelerates. The price of molybdenum is more than 50% off pre credit crisis highs yet demand is seriously exceeding supply.  China has imposed mining quotas in the past and is expected to curb exports again in 2011.  China has also a need for high strength steel.  Even though it produced 50% of the world’s steel, China only consumed 30% of global supply.  If they consume more molybdenum similar to other producers they will demand a much higher amount of imports.  They have a need for high strength steel which requires molybdenum.  China’s recent stimulus which focussed on infrastructure requires a large supply of molybdenum as it is needed for bridges, power plants and pipelines. This trend has a huge impact on many emerging markets which was relying on the Chinese supply.  Korea and the Japanese are under pressure to find supply for their own needs.  Other growing economies which require high performance steel are going to look for ways to control future supply. Recently the Chinese Government accelerated and approved funding through Hanlong Investments for General Moly’s Mt. Hope project accelerating the funding and showing their commitment to the project.  Mt. Hope is the largest and highest grade primarily molybdenum project in development.  Shares have soared on the news and the enthusiasm from the Chinese Government.   [...]

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