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Anyone who would advise his subscribers to ‘short-sell’ a stock or commodity during a roaring bull market is ‘one brick short of a load’.
While it may be said that some traders are able to score a nice chunk of cash by selling short, the fact is that the majority of people who try it end up losing money.
It beats me why Americans would put money into the pockets of a foreigner who uses every opportunity to undercut the US President, (who is trying his best to fight terrorism in Iraq instead of in Manhattan), while the French and Germans, instead of doing their share, are still enjoying the spoils they obtained from trading with Saddam.
The big mistake the advisors who tell their clients to short gold NOW, (as opposed to doing so when gold is temporarily overbought), is because they focus on the HUI and XAU indexes.
In May 2006 the brilliant Adam Hamilton wrote an essay in which he pointed out that a lot of gold producers are currently trading at very high P/E (price to earnings) ratio’s. Some had ratio’s exceeding 100! (I’m sure if you contact www.zealllc.com that they will make that article available to you).
This fact tends to weaken the indexes of which these stocks are a part. The higher the PE ratio, the less attractive the stock is to potential investors, and the more difficult it is for the index to rise as a result. When an advisor builds his case on a weakened index, he is building his house on sand.
Another problem with the index may be the fact that Newmont Mining is a major part of the index. NEM, although a well-managed company nevertheless had some negative publicity, (for the most part un-deserved).
A lot of money that used to go into ‘Blue Chip Mining Stocks’ is now finding its way into the electronically traded precious metals funds, such as GLD and SLV.
Let me share with you now a GOLDEN RULE, made famous by Richard Russell, Joe Granville and many other successful investors. It is this:
When a stock or commodity has a rising 200 DMA (Daily Moving Average), every time this stock or commodity trades near its 200DMA, it is an opportunity to buy!
Now let us take a look at the following charts.
Featured is the daily bar chart for the GLD, which trades on the NYSE. Notice the 200DMA (red line), which is rising. The 50DMA (blue line) is rising and has just completed a positive crossover (blue arrow), this is bullish. Price is trading near the 200D (buying opportunity), and the latest bar on the chart, closed above the high point from the day in which the recent low was made. This is a technical buy signal.
Featured is the XGD, the Gold Unit that trades on the TSX in Toronto. Once again, the 200D is rising, and the 50D has just made a positive crossover (blue arrow). Price is near the 200D (buying opportunity). The closing price in the last bar on this chart is back above the 200D, and it is near the top of the ‘range’ for the day.
Featured is the electronically traded silver unit that trades on the AMEX. This chart is as near to ‘perfect’ as one could hope for.
The upward channel is well defined. The 200D is rising. The 50D touched the 200D without going below it! Down volume on the last downswing towards the 200D was lower than the volume on the preceding downswing – see down sloping dashed line. (This is bullish). Price has just ‘taken out’ the price bar of two days ago when the low was established. The RSI (top of chart) has just completed a double bottom, and has started to rise again. HI HO SILVER!
We finish our presentation on behalf of the bullish case with this chart. It is the 2 year daily bar chart for the POG (price of gold).
During the summer of 2005 the POG dipped below the 200D for a ‘double bottom’. Next the 50D rose above the 200D and stayed there while gold advanced from 425.00 to 725.00!
Today we are faced with a similar chart pattern. The POG has once again dipped below the 200D, the 50D has made another positive crossover (green arrow), and once again we find ourselves with a buying opportunity near a rising 200DMA.
In closing I will admit that the ‘negative thinkers’ out there, and those who like to take cheap shots at the people who are making the big political decisions, will no doubt use their influence to try to shake the confidence of those of us who believe in the long term bullishness of this precious metals market, and in the short term they may be able to slow the train down somewhat. May I suggest that if you want to trade like a pro, then do what the pro’s do. BUY WHEN THE 200DMA IS RISING, AND PRICE IS NEAR THE 200DMA.
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DISCLAIMER: Please do your own diligence. I am not responsible for your trading decisions.
Peter Degraaf has been active in trading precious metals since 1956. He issues a weekly Email alert to his many clients. He offers a 60 day free trial to his service. His email address is:
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