By Ben Morris
Precious metals are making a move. Gold and silver both bottomed the day after the U.S. Federal Open Market Committee raised rates in mid-December, and have been on a steep climb ever since.
This week, both metals hit three-month highs. Gold traded as high as $1,264 per ounce and silver traded up to $18.48 per ounce, which could be the start of the next big leg higher for both gold and silver.
If you hold any precious metals positions in your portfolio, this is welcome news. It was a rough 2016 for gold and silver bulls. If you held gold and silver stocks, you likely stopped out of some of your holdings. While we stopped out of a couple of positions, we’re still holding a couple of 50%-plus winners.
As a reminder, I suggest everyone hold at least 5%-10% of their wealth in gold and silver. (That can include some mining stocks, as a speculation.) Since the 2008 financial crisis, global central banks have employed a gigantic “E-Z Credit” program of money printing and low-to-negative interest rates. It’s a reckless program that debases paper currencies and runs a high chance of ending in disaster.
Gold and silver, which have been used as money for thousands of years, are great forms of financial-disaster insurance. Governments can’t print them on a whim, as they do with paper currencies. So people turn to gold and silver when they’re worried about the value of their cash declining.
The natural question today is, “What now?” Should we buy gold and silver miners to earn big profits on the next leg higher? Should we wait for a pullback?
Let’s take a look at the most important big-picture chart for the precious metals. It’s a huge “wedge,” or narrowing trading range in gold.
Often, when any asset breaks out of a wedge, it makes a sharp move in the direction of the breakout. Right now, gold is in the middle of its trading range.
Two of the biggest clues that point toward the next big move in gold are the direction of the U.S. dollar and of the 10-year U.S. Treasury yield (the benchmark for global interest rates). But both of these are in a sort of “no-man’s land” right now, too.
Gold will likely climb toward the top of the wedge at around $1,310 per ounce with silver likely move in the same direction. However, we don’t have a strong buy signal right now.
Here’s my advice: If you don’t have at least 5% of your investable assets in precious metals, go ahead and buy some today. Start with the physical metals, in coin or bar form.
If for whatever reason you don’t want to own physical gold and silver, the next best thing is owning a fund that holds the metals in a secure vault, like the Central Fund of Canada (CEF). Currently, it trades at a big 9% discount to the actual value of the gold and silver in its vaults. That’s a great deal.
You may also want to put a little bit of money into a fund like the VanEck Vectors Gold Miners Fund (GDX), which holds a basket of gold miners. It will be more volatile than gold, both on the upside and the downside. For most people, miners should probably be a smaller percentage of their holdings than the physical metals.
If you already hold 5%-10% of your portfolio in precious metals, you can add to your holdings today. But don’t go overboard. With CEF trading at such a big discount, that’s my top recommendation. Any miners that you add should be small, “starter” positions.
With gold trading inside of its wedge, the reward-to-risk profile on the miners isn’t great right now. The current 10-week uptrend is a positive development. But it’s not time to get overly aggressive.
If you’re anxious to buy, take another look at that chart above. There’s no need to hurry and take big risks. If gold breaks out of the wedge to the upside, we’ll have a much better trade setup. At that point, we can expect much higher precious metals prices ahead. That will be the time to get aggressive.