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Metals are heavily overbought

As an update to my previous post about palladium and uranium, although I still like both of these metals better than others such as gold, silver, and copper, now is probably a good time to step away from being long or short all of the metals. Precious metals in particular haven entered a period of speculative frenzy. Pundits and promoters are throwing around outrageous price targets for gold of $2,500 or even $6,000 per ounce. Silver speculators and promoters are even more aggressive, with claims that silver is going to $100 or even $250 soon.

Outrageous price targets, rumors of "no supply", retail investors piling into the trade, and anyone who disagrees being called a fraud or short seller are classic signs of a bubble. That's where we are right now in the metals. Yes, this could inflate some more, but the risks of being invested either long or short in metals right now are much higher than the potential gains. Most metals, especially the precious metals, are trading 30% to 50% above moving averages. They are extremely overbought. Most of the longs are momentum traders with limited experience trading metals or metals stocks. These "investors" will sell as soon as the price momentum starts to fade. This could lead to a severe cascade of selling, especially because of the ETFs that are now heavily involved in trading metals. On the other hand, it's also possible that the parabolic move could continue a little longer, which is why it's best to just stay away from this sector and wait for a substantial correction before getting back into it.

I would specifically wait for metals and mining stocks to get back to at least their 20 day moving averages or even better their 50 day moving averages before going long again. On the short side I would stay away from doing anything unless there is high volume selling and a change in fundamentals such as higher interest rates in China or a scaling back of QE2 efforts by the Federal Reserve.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.