Precious Metals: Time To Change Strategy

Includes: FCX, GLD, SLV
by: BubbleBustInvesting

Gold was in another correction mode on Tuesday, plummeting below $1,380 in early afternoon trade - a big setback to the bulls betting that the world will come to an end in 2013. Silver dipped below $22.

Gold ETFs like SPDR Gold Shares (NYSEARCA:GLD) were also sharply lower (down 0.70 percent); silver ETFs like iShares Silver Trust (NYSEARCA:SLV) followed through in sympathy (down 0.80 percent), and Freeport-McMoRan Copper & Gold (NYSE:FCX) was down 1.1 percent. But after the 9th correction in less than a year, isn't time to go bargain hunting?

Judging from the technical chart of GLD and SLV, the answer is no, as the two ETFs trade well below their 200, 100, and 50-day moving averages. And many of the factors that blew air to the bubble are no long on investors' radar.

First, inflation, the ultimate tailwind for the metals is nowhere in the offing, as evidenced by yesterday's meager Producer Price Index (+0.2 percent).

Second, European sovereign debt risks seem to be evaporating for the time being, as the EU and the ECB seem to have things under control, at least for the time being.

Third, an improving U.S. economy will make it less likely that the Fed will launch another round of Quantitative Easing (QE) -- the primary fuel of the recent gold rallies. Besides, Fed's QE impact on the dollar and the metals has been increasingly neutralized by ECB's and Japan's QE.

Fourth, due to anxiety over Abe's promise to print yen until it creates 2 percent inflation in the land of the rising sun, the dollar has been falling sharply against the yen.

Compounding the problem of weak fundamentals is the crowding of precious metals trades, which can make the exit from these investments extremely painful.

(Click to enlarge)

Nevertheless, precious metals may be forming a short-term bottom at this point, as suggested by the three-month chart. This means that it may be time for investors to change strategy, trading precious metals rather than buying and hold them, as was the case in the last five years.

Disclosure: I am long FCX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.