Gold/Silver Correction to Set Up Next Major Move in 2011

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"The short-term trend is exhausted; could see shakeout in gold and mining stocks"

"He who fights and runs away
May live to fight another day;
But he who is battle slain
Can never rise to fight again"
-Oliver Goldsmith
Traders entered the new year exiting their commodity positions on fear of growing austerity measures and possible exit strategies out of Central Bank quantitative easing strategies. There has also been a huge move into risky equities from traditional safe havens, but that may end in the next few weeks.

When the conductor desires to lower the volume and tempo of the orchestra, he motions downward. After sometime, it is followed by a loud and explosive crescendo. At this time, I am navigating my readers to be cautious and play defense in equities, gold and mining stocks. This correction will take some wind out of the sails of late comers to this precious metals rally who bought when gold and silver were way extended in October and November, are now having to suffer through a possibly quick and painful decline. However, this current shakeout will provide a slew of new mining recommendations and buy signals on gold and silver bullion. Corrections in secular bull markets shakeout the weak hands, while the disciplined investors wait for oversold conditions and long-term support to add or enter long positions. Many high-quality mining stocks are creating sound bases that will provide us highly probable signals where the odds are more favorable for a significant gain.

As you are well aware, I have been counseling defense since October, when I sold my core bullion positions and moved into uranium, molybdenum and recently rare earths making very large gains in the past three months. The gold bullion market has been rangebound and volatile. Our individual miners have acted much better outperforming gold and the large cap miners.

Now this consolidation in gold just made a fake breakout for the third time after finding support at the 50-day moving average. There is nothing as bearish as a fake breakout. It was quite important that this most recent attempt to break out from the 50 day should've been successful. That third reversal was quite bearish as institutions came back after the holiday break to sell their gold positions and bid up the U.S. equity market. This signals that the short-term trend has been exhausted and that we could see a quick shakeout in gold and mining stocks. Gold appears to be forming a bearish head and shoulders pattern. Further weakness today should confirm this pattern and the selling should intensify.

GLD 1/4/11

Gold will again approach our long-term support areas indicated in the blue circles in the chart above, which is when I take a large and aggressive position in bullion and mining stocks. I prefer to buy at support, and when fear is high. All markets are volatile with ebbs and flows between euphoria and gloom including gold. This correction is very healthy for the long-term secular bull market in precious metals. I believe it still has many years to run but there will be corrections and times to buy when fear is increased and where gold is at key support levels. That is why I have urged readers to lock in profits when stocks have reached targets, as they will be able to enter at highly profitable times similar to the end of July in 2010. This is a disciplined approach, which removes getting caught in the euphoria and gloom of the market. This gold topping pattern needs to be monitored and during times like this, the quote above from Oliver Goldsmith needs to be reviewed. In the market, one must learn what battles should be fought and when it is better to retreat.

The high volume distribution and failed breakouts into new highs is indicating institutional selling. I choose to fight another day.

Over the past three months, gold has been consolidating working off overbought levels. I believe this next correction will set up precious metals investors with the next major buying opportunity in bullion like the one we saw in late July.

There will be profits in miners and precious metals as we have seen in the past. Over the past few weeks, it has been hard for me to find sound patterns and I was reluctant to make new recommendations because of the overall gold bullion market. The recent bounce off the 50-day failure at new highs signals that now traders should wait for further weakness as this will provide the next ideal buying opportunity. The bearish head and shoulders pattern, coupled with the high volume reversals should signal caution. Instead of getting caught in the hysteria, it is best to try to capitalize on it.

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