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Is Now a Good Time to Buy Gold and Silver?

Sep 12, 2012
Chad Karnes, CMT

Knowing when investors are panicking is often a great buying opportunity. Similarly, knowing when investors are euphoric also can offer a great opportunity. Precious metals are giving us a big opportunity right now.

Silver is up over 20% in just over one month.  Gold is up over 7%.  Is now the time to buy?

Baron Rothschild in the 1700’s is credited with the phrase, “The time to buy is when there is blood in the streets”.  If this is true for the right time to buy, then the ideal time to sell logically must be when the opposite of that occurs.

But, what is the opposite of “blood in the streets”?

We can approach this dilemma two ways, literally and metaphorically.

Literally, the opposite of buying when there is blood in the streets is something like selling when there is water in the woods or selling when you are without oxygen in the sky...and those of course make no sense.

Metaphorically, buying when there is blood in the streets means buying when there is panic, confusion, and likely large losses (blood being red as are losses).  Now we are getting somewhere.

Opposite of Panic and Confusion

Some words for the opposite of panic and confusion are self-confidence, fearlessness, assurance, and euphoria.  Now we are really getting somewhere!

Buying when there is “blood in the streets” is similar to selling when there is “euphoria in the air”. 

Euphoria, self confidence, and panic are words of emotion, and an investor needs to understand the emotion of the markets in order to understand its buying and selling opportunities, such as a time of panic or euphoria.

We now have a buy criterion and a sell criterion as well as a trading strategy which involves the emotion of the markets (NYSEARCA:IWM).

Should You Buy Gold and Silver Now?

To answer that question we need to know simply the emotion of the precious metals market (NYSEARCA:GLTR) and if there is more blood in the streets or euphoria.  

A very good way to understand emotions in the markets is to utilize sentiment and opinion surveys.

Currently, sentiment readings for Gold (NYSEARCA:UGL) and Silver (NYSEARCA:AGQ) that we follow have reached upward extremes.  This means the popular opinion is more self-confident and assured than it is panicked or confused.

Based on Baron Rothschild’s famous quote, now would not be the time to pile into metals.

Should You Sell Gold and Silver Now?

Silver (NYSEARCA:ZSL) and Gold (NYSEARCA:GLL) have only reached current levels of positive sentiment four times in the last 2 years.  In October 2010, April 2011, August 2011, and February 2012, sentiment surveys were extremely positive on Gold and Silver, as they are once again today.  Not coincidentally all four of these previous timeframes were significant tops in Silver and Gold prices. Is this time different?

Based on sentiment the upside in Silver and Gold is likely limited and if you hold gold and silver for a shorter or intermediate term you should probably look at taking profits.  The emotion of these markets is short term euphoric.

Combining Sentiment and Technicals for a Buy Signal

At the ETF Profit Strategy Update we use sentiment and technical analysis to help us get ahead of market trends.  We did this with Silver in late July when sentiment was negative and price was holding support around $26.

On 7/29 I was watching silver prices and informed our subscribers in our Technical Forecast that, “The rising red short term trendline support line currently just above $26 is also a good stop loss spot and support line to watch.  Good risk / reward set ups such as these are what we look for in our trading.”

The following chart accompanied that commentary showing the breakout, 200 day MA, and trendline support levels.  We also were watching sentiment, which was at an extreme.


On 8/5 after that rising red support trendline held, I followed up with, “For aggressive traders that are long SLV I have identified two good stop levels with the horizontal support at $26.55 as well as the lower rising support trendline at $26.15.”  Prices rallied from there.

Sentiment for Gold and Silver were much nearer blood in the streets levels than they were euphoric in early August.  The opposite is occurring now as sentiment has shifted to extremely positive after the large August gains.

What's Next for Silver and Gold?

This week silver gave back some of its recent gains and may be starting to react accordingly to its extreme sentiment levels.   However, with today's Fed announcement, Silver and Gold are hitting highs again, so sentiment may get even more extreme.

Longer term, many open gaps exist that risk being filled, likely keeping pressure on Silver (NYSEARCA:SLV) prices.  Fibonacci resistances are coming into play on Gold (NYSEARCA: GLD) as well. 

As long as sentiment remains elevated, Gold and Silver should struggle to push much higher.  The time to buy will be at the next pullback to support levels along with a drop in today's euphoric sentiment.

The ETF Profit Strategy Newsletter provides comprehensive sentiment and technical analysis to identify high probability trade setups across multiple tradable ETFs and Assets.  Right now Gold and Silver are overbought and maintain high levels of sentiment.  Once sentiment comes back down to earth, we likely will get a better buying opportunity.  Our Technical Forecast, published a few times each week, is watching the key support levels that could provide great Gold and Silver buying opportunities again.  

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