Careful Shorting the Precious Metals and Miners Here

Late-last week, I sold the rest of my inverse gold ETF and flipped over to the camp that the initial short trade in the precious metals and their metals had largely concluded. To be clear, virtually all of the gold and silver-related charts are in clear downtrends if not outright bear markets. But bear markets feature some of the most breathtaking and ferocious rallies you will ever see, the stuff of which puts the current run-up in equities to shame.

And after yesterday’s high volume bullish engulfing candles across the board, followed up by today’s “inside day” (inside day, meaning price fully within the confines of yesterday’s engulfing candle) also across the board, I do believe there is a substantial risk of getting caught short here. When I say “caught,” I mean waking up to a 20% drawdown in any given position.

To support that notion, consider the daily charts for the metals and the miner ETF below. Note how the Bollinger Bands were pinching in prior to this most recent leg lower. We saw a swift move down before yesterday’s dramatic reversal. What you often see with pinched bands is a false move one way which stops on a dime before the “real move” occurs in the other direction. The pinched in Bands indicate compression in price, which often leads to explosion–The trick, of course, if figuring out which way we see the explosion.

I have no positions on in the space currently, and after a week or two of rallying I will revisit the bear case. But if you are burying your face in the sand here and “going with the trend,” you might not fully be considering the risks involved.

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