We have just received and interesting question from one of our Subscribers, and we would like to forward our reply also to you.

"Lots of analysts are talking about this being a long and deep correction. We've already been hit hard on speculative positions opened when a rally seemed imminent. Now, it looks as though long term holdings are threatened as well. If gold is heading into the low 1300's or high 1200s, this would be time to cash out any long term profits (to offset losses on speculative holdings). Any thoughts on this? It's looking dark and gloomy out there."

The situation is tense because mining stocks are very close to their 2008 highs (XAU Index is slightly below the 2008 high and HUI is right at it), and this is the most important technical development that we see right now. Mining stocks often move along with metals, so it is likely that whichever way mining stocks move from here will be the direction also for the next move in gold and silver.

It's important to become neither greedy, nor scared of the market at any point, and situations like the one we have today are particularly tricky. Consequently, let's stick to the facts, and then analyze the situation and estimate what is the most appropriate strategy.

Can we have a bigger decline from here? Yes. Gold, mining stocks, and especially, silver moved higher significantly and a correction - even a sharp one - would not invalidate the whole bull market, and thus would be somewhat in tune with long-term positive fundamentals. In other words - positive fundamentals do not invalidate the possibility that a correction may take place.

Can we see another huge rally from here? Yes. Precious metals have been correcting for more than a month and are not short-term overbought at this point.

Which of the above outcomes is more probable? The bullish case is slightly more probable, because - after all - this is a secular bull market, and the previous real-inflation-adjusted high for gold (over $6,000) is not even close to where gold is today.

What's more risky - being out of the market, or being in it? Being out of the precious metals market is the risky thing because we believe metals will move much higher in the following months, so if you're wrong about being in the market, you are still very likely to gain tremendously in the end. In case of being out of the market, you are likely to end up missing the boat completely if you don't get back in within the following months / years.

Based on two previous paragraphs, we can infer that being out of the precious metals market with one's long-term holdings (which we believe should make up most of one's precious metals portfolio) is a profitable thing to do only during the most bearish situations. We are not at this point yet. This could be the case soon, if both: XAU and HUI Indices move visibly below their 2008 highs and then move back to them on low volume. This would most likely make us send a "sell a part of your long-term holdings" alert - similar to the one we sent on Nov 9th, 2010. Again, that is not the case yet. At this point we only have a chance of that happening in the following days, and that is not bearish enough to close our long-term holdings.

With speculation - there's always the next train and we strongly believe that a speculative position should be opened only when it appears particularly favorable - regardless whether the current position is at a profit or loss (actually, that's the most difficult tactic to implement in practice). This approach does not guarantee that there will be no losses along the way. There will be. However, with this approach in mind they will be either smaller than gains and/or they will take place rarely, when compared to winning positions.

In this case, we have mining stocks at 2008 high / slightly below it. If market moves quickly up on high volume, re-opening long positions might be a good idea. If a breakdown is confirmed, we will most likely suggest opening speculative short positions.

As always, we will keep you updated, should anything change.

Thank you for using the Premium Service.

Sincerely,
Przemyslaw Radomski