Gold Price And Silver Price Have Topped
London (May 4) Summary•Our elevation portfolio sold our Silver Standard And Market Vectors ETF a few weeks back which may have been early but will still end up being the right trades.
•Technicals are showing an intermediate top is near and lower prices are on the horizon in the near term.
•Volume in the triple leveraged bearish Mining ETF has exploded which usually mean lower gold prices are coming.
•Implied Volatility is above average in the Gold Mining Market Vectors ETF. Here is how to control risk as Gold makes it way down into its intermediate low.
Our portfolio sold our Silver Standard (NASDAQ:SSRI) and GDX (NYSEARCA:GDX) positions a few weeks back and although we may have been early in liquidating, I still feel it was the right decision to sell. Why? Well if we look at a long term chart of Gold and monitor the 200 daily moving average, we can see that the Gold chart has rarely been this stretched above the 200 daily moving average. In fact the mining chart shows this even more alarmingly (200 day average is 30%+ below the current price) which is why we exited this sector a few weeks back.
Make no mistake about it, both the gold price and the mining sector will revert to its mean as they have done since day one. Ignore all these hyperinflation analysts that continually state that Gold is going to the moon. It may very well see much higher prices in the forthcoming years but it wont go up in a straight line. We saw already what happened when Gold went to over $1900 an ounce and Silver almost reached $50 in 2011. Both metals came tumbling back to their means and I expect the same this time around.
Another sign that a top in the precious metals sector is imminent is the explosion of volume in the leveraged inverse (Bearish) ETF (NYSEARCA:DUST). Why this particular ETF? Well when Gold rallied hard out of its December lows (which will probably end up being the bottom of the Gold bear market), the volume in (NYSEARCA:NUGT) (Leveraged bullish ETF) went through the roof. Elevated volume in leveraged ETF's are a great way to spot turning points in markets which is why current volume in DUST should not be underestimated.
So if Gold is going to form an intermediate top in the near term and move down into an intermediate bottom over the next 4 to 8 weeks, how can investors take advantage of this move? Well this portfolio is going to be long only as I find "shorting" a very difficult way to make gains in a portfolio. Why? Well its very difficult to spot bottoms and one is always anxious in taking profits especially if the sector in question is in a bull market. In saying this, let's outline a trade with defined risk that one could take on if one's portfolio allowed it.
If we look at a volatility chart of we can see that implied volatility is trading at the higher part of its range. This means that option premium is higher than usual which is good news for option sellers. Therefore instead of shorting the index outright which is undefined risk, one could sell a call spread which would give the investor defined risk on the trade. For example the GDX July 2016 26-29 call spread is selling for around $1 which is your maximum gain on this trade (assuming 100 shares = $100). Furthermore the maximum loss would be $300 but this would only happen if GDX was trading above $29 a share at expiration.
Therefore if you are thinking of shorting the gold market, GDX would be the vehicle I would use due to its current high volatility and liquidity. However I warn you that I believe Gold has begun a fresh new bull market and surprises always happen to the upside in bull markets. If you are shorting, define your risk as in this way your losses will be limited if Gold gives an unlikely surprise to the upside.
Source: SeekingAlpha
