Precious Metals Selloff Can Help Drive Gold to $5,000 Ultimate Price Target

Last month, we offered our readers a strategy for trading gold. The basics of the strategy are as follows:

1. Find a strong trend, defined as the price staying consistently above (or below, for shorts) the 10-day exponential moving average. Enter when the price reaches the 10-day EMA.
2. Place the stop on the opposite side of the moving average from the price. Subtract half of the daily average true range (ATR) from the moving average to determine distance of the stop.
3. There is no target. Trail the stop by keeping it below the !0-day EMA by half of the daily ATR until the stop is hit.
4. If long, never lower the stop, and if short, never raise the stop. 

While the article appeared on September 5 (point A), the first entry opportunity (green, 3,638) didn’t occur until the 19th of that month (point B). That’s how long gold remained above its 10-day EMA (blue), a sign of a very strong trend. 

The stop (red) was trailed until the price finally broke through the moving average on Tuesday, and took us out of the trade (point C). On that day, gold lost about 5%. 

Some sharp readers pointed out that the same strategy could be applied to silver. Actually, it can be applied to most trading instruments (excluding stocks) that are moving within a strong trend. It was designed with futures and currency trading in mind.

The first possible entry for silver occurred on September 17 at 41.56 (point A, green). The stop was raised by trailing it below the 10-day EMA by half of the daily ATR until it was hit on October 21 (point B). On that day, silver fell by about 7%. 

What are the implications of Tuesday’s selloff in precious metals? If you’re a long-term precious metals investor, there’s no need to make any changes.

If you’re a short-term trader, risk management is a top priority. This means trimming or exiting positions that were not intended to be held for months or years.

Is a collapse coming in silver and gold? While anything is possible, it’s much more likely that these precious metals will enter a period of consolidation. That consolidation period should actually help gold to reach our ultimate target of $5,000, as explained here.

Earlier this year, gold consolidated from mid-April through mid-August (shaded yellow) before resuming its ascent. 

Keep in mind that pullbacks and consolidations aren't fun, they are healthy for markets. Ultimately, they help to sustain long-term rallies, which could otherwise burn out. While the short-term gold trade may have ended, long-term investors have no reason to make any major changes to their plans. 

At the time of publication, Ponsi had no positions in any securities mentioned.