It's time to accumulate precious metals
A sector specialist highlights his scale-in buying strategy and his favorite gold and silver picks.
The recent pullback in gold has been an opportunity to accumulate precious metals positions.
However, the window on low-risk, longer-term precious metal investing is going to close. The time to accumulate is now. Here's a look at some of our favorite positions.
We recommend taking advantage of selling panics is to scale in your purchases. First, decide what amount of money you are going to put into the purchase and then buy a portion.
I like to buy one-third to one-half initially at or below our recommended price. Then scale in with additional purchases at successively lower prices.
If you have the skills to identify support levels, use them, or use a percentage – say, at 10% drops below your initial purchase.
Normally, I will target two additional purchases using one-half of the remaining money at each buy level.
For example, if you were to put $10,000 into a position, you should buy $5,000 at the initial price, then $2,500 at 10% lower, and the remaining $2,500 at 10% below that.
Scaling in can help overcome the fear you will have when buying into weakness. If you are truly afraid to make purchases as the market is falling, you might also consider that perhaps you are investing too much and cut back your purchases.
It is better to have even a small position rather than none at all when the next up leg gets under way.
In that light, it is much better to invest in the metals now when they are weak rather than waiting until gold breaks over $2,000 and becoming a panic buyer.
Investing on the basis of your emotions is a very poor investment model. You need to be buying when others fear and fear when others are confident.
As a result, we are adding Central Fund of Canada (CEF) and Silver Wheaton (SLW) to our recommended list.
Both of these are bullion-related plays. At $31.00 or less, Silver Wheaton is an excellent pure play on silver.
Central Fund of Canada holds an approximate 50/50 position in both gold and silver bullion.
It is a closed-end fund - not an ETF - which offers investors direct ownership in the bullion that is held physically for the stockholders. This will not be the case with an ETF.
Meanwhile, Goldcorp (GG) and Yamana (AUY) are of particular interest here. Goldcorp is trading under its buy price of $50.00 and can be accumulated up to that $50.00 limit.
On a seasonal basis, gold usually marks time during October and sometimes into November before making a strong up move into the first quarter of the new year.
Technically, I expect to see this pattern unfold as usual this year with a low finally completed - replete with positive divergences in MACD and RSI - over the next few weeks.
You should be using further weakness to accumulate in anticipation of the next rally, which I expect will extend to $2,000 during the first quarter of 2012.
Once over $2,000, the true blowoff phase will be solidly under way. At that point, it may well be too late to invest in gold.
- Coeur d'Alene: 'Silver on sale'
- Central Fund of Canada: 'Excellent hedge'
- Newmont Mining: Cash in on gold
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These hot movers could rise by double digits in coming months.
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