What You Need to Know About the Red-hot Precious Metals Market

precious metal stocksCommodities are hot; in fact, “sizzling” is probably a more realistic indication of the momentum in energy and metals. So expect to pay more for gas at the pumps and jewelry. Perfect—just in time for the holiday shopping season.

Take a look at gold. The December gold futures are hot and broke above a recent chart top of $1,388.10, followed by $1,400 to $1,422 as of Tuesday morning trading. There appears to be no stopping the upward push by gold on the chart, albeit is heavily overbought.

I had mentioned a possible break of $1,400 in the near term, but, to my surprise, it came earlier than I thought due to the heightened market momentum. The strong break at $1,388 is critical, as it help us avoid a bearish double top for now. The near-term picture is bullish and the Relative Strength is above average, so there could be more gains in the near term. Watch to see if $1,400 holds and a move towards $1,500 occurs prior to the New Year.

December Silver has been following gold higher, with the continuous silver futures contract at a 30-year high, above $28.00 an ounce.

Yet I’m not convinced that the buying is or the current price levels of gold and silver are truly justified. Debt and deficit issues in some of the European countries, including Greece, Spain, Portugal, and Ireland, are worrisome and create some issues in the Eurozone. The European Union had adopted a massive austerity program aimed at helping keep the economies in Europe afloat and allowing growth to come back. This adds risk and drives buying to gold.

My view is that gold and silver are not correctly priced in the market. The reality is that part of the gains has clearly been driven by heightened market speculation by traders of futures and Exchange Traded Funds (ETF) specializing in gold.

Just like equities where speculative trading drives stocks up to unrealistic levels, we are seeing a similar situation arise in commodities, especially the precious metals. This is not to say that gold and silver will not be heading higher, as they likely will based on the trend. The concern is the potential of a pullback given the rapid rise of gold and silver.

If you are trading gold and silver ETFS, you can ride the momentum, but be careful, as shorts are increasingly coming into play. There are many momentum traders now, but if they exit, prices will likely fall. For now, ride the momentum.

If you are playing options, you can trade a straddle strategy that allows you to make money on any key move up or down. Take a look at the SPDR Gold Trust (NYSE/GLD); there are numerous option strike prices and expiries available to initiate a straddle strategy.