Think twice before putting new money in gold stocks

For the last 10 months or so we have watched the precious metals mining sector try in vain to put in a decent rally only to run out of steam and disappoint some of its most ardent supporters, including us.

Taking a quick look at the chart we can see that the 400 level has been penetrated as political risk makes the headlines in South America, adding more uncertainty to the mining sector. The MACD is heading south and getting close to the '30' level, which is usually an indication that the stocks have been oversold. The RSI has turned and is now heading south, unfortunately.

We remain unimpressed by the performance of the mining sector and are relieved that we have kept our powder dry for the last 18 months or so, as stock prices have tumbled and now present us with cheaper entry levels. Are they worth buying now you ask, we don't think so. From today until Labor Day in the United States, September 3, the holiday mood will take over with the markets trading in a narrow range and remaining flat. This time last year the precious metals stocks did rally heartily on the back of a massive move in gold prices, however, we are not expecting a repeat of that event.

There could be a black swan event putting fear into the markets, which could drive a small rally in the price of gold and silver. Again, when it’s a 'fear on' trade the main beneficiary appears to be the U.S. dollar, which has reached a recent high of 83.66 on the U.S. Dollar Index. A year ago it was struggling to hold the '74' level. It would appear that bad news, normally good for gold, is no longer boosting gold and silver prices, but restraining them. We need a turnaround in sentiment and interpretation of these factors to cause gold prices to rally strongly, thus setting the stage for a massive rebound in the mining sector.

Until we have some indication that this is happening we will not increase our exposure to the mining stocks and will continue to look for opportunities in the options arena, where leverage can be found, making a small move in the underlying asset a profitable trade. Not for the faint hearted and never deploy money that you cannot afford to lose.

Sleep tight.

Disclaimer: www.gold-prices.net or www.skoptionstrading.com makes no guarantee or warranty on the accuracy or completeness of the data provided. Nothing contained herein is intended or shall be deemed to be investment advice, implied or otherwise. This letter represents our views and replicates trades that we are making but nothing more than that. Always consult your registered adviser to assist you with your investments. We accept no liability for any loss arising from the use of the data contained on this letter. Options contain a high level or risk that may result in the loss of part or all invested capital and therefore are suitable for experienced and professional investors and traders only. Past performance is neither a guide, nor guarantee, of future success.