Nothing's easier than hopping on board a consistent and trending market. A Buy and Hold strategy is the most effective. However, the precious metals market continues to trade within the confines of a fairly narrow range.
After peaking briefly just above $1,200 in early December, Gold has traded in a $100 range for the last 4 months, primarily oscillating between $1,050 and $1,150. After slighty piercing the upside part of the range several days ago and giving signs that it was ready to resume its bull market, the yellow metal has once again given faithfull investors a temporary heart attack - dropping about $25 on Friday.
The benchmark index for precious metals stocks, HUI or "Gold Bugs Index", has also traded within a fairly narrow range despite a great deal of intra-day volatility. After reaching a high of about 500 in early December, the HUI lost a quick 25% to the 375 level in February and has been gently climbing in a stair-step fashion.
Trading a market is always virtually impossible except for the extra-ordinarily skilled or lucky. In the case of GOLD, or the underlying HUI, the pattern has demonstrated very little momentum or continuity in either direction. So, trading has resulted in whip-saws, unnecessary transaction costs and frustration.
The question remains as to what to do now, especially in light of the Friday smackdown ostensibly driven by the SEC allegations levied against Goldman Sachs (GS), aka "Government Sachs". It would seem that these allegations are specific only to the company and not a market event. It's even more difficult to comprehend how the "GOLD"man Sachs situation would cause the smashing of GOLD itself.
The answer is quite simple. They aren't related! The reaction in the overall market and the precious metals space was purely coincidental. The S & P 500 was already tremendously overbought and overdue for a sharp correction. On some dimensions, so was GOLD and the precious metals market. Traders often use significant news events as a reason to go to cash, especially in advance of a weekend, so as not to get caught in an adverse situation while the markets are closed.
This led to the significant broad market selloff which took other financial assets with it. GOLD and the underlying precious metals stocks weren't nearly as stretched as the general market, but there had been a decent rally in the last several weeks and nimble traders used the news as an opportunity to take profits.
From a technical perspective, the charts of GOLD and HUI remain in a bullish configuration. Neither has experienced a downward penetration of their respective 200 day moving averages. If that should occur, it might justify taking a closer look.
None of the underlying fundamental factors suggest that any change in outlook is warranted. Physical supplies of GOLD and SILVER remain tight and precious metals mining companies continue to deliver record revenues and profits.
The effects of record stimulus spending remain to filter through the economy. We've witnessed some, but not much, good news on retail sales, GDP and corporate profits. Yet, without much benefit to employment. Economists refer to that initial reaction as the "output effect".
Historically, the "output effect" is followed, with a time lag, by the "price effect". The price effect, or an increase in reported and un-reported inflation, is still simmering beneath the surface. The inevitable price effect will prove to be an excellent underpinning toward the continuation and acceleration of real assets such as GOLD and SILVER. As that occurs, the precious metals companies will continue to spit out even better profits and will be leading market participants.
One should view these temporary one- or two-day selloffs in precious metals stocks as gifts. Once the mining sector is clearly into gear, it will be very difficult to board the train. The character of the market will change and short-term selloffs will become fewer and shorter.
During the great NASDAQ bubble, as the tech-market accelerated, many experienced investors became skeptical of the move and missed the opportunity to generate incredible wealth. I should know. I was one of them!
The GOLD and miners market have all the hallmarks of being on the cusp of entering a hyperbolic growth phase. Letting the day-to-day noise affect our emotions and investment strategies is a mistake that even the most experienced investors make. No one has a crystal ball. However, until demonstrated to the contrary, Marko's Take says stay long and stay patient.
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