Chart of the week: should you take profits in Fresnillo?

The market could be too bullish on gold and silver, warns ii columnist John Burford.

3rd August 2020 14:22

The market could be too bullish on gold and silver, warns ii columnist John Burford.

I have been covering this FTSE 100 silver miner for the last few years – my last post, from 6 April, was Is Fresnillo (LSE:FRES) a Buy Here - and in that time, the shares have been in major bull phases. But if you had bought in April 2013 at £12.50, you would have seen four mighty swings up and down of 80% or so – and ended up precisely at today’s quote! How’s that for a rollercoaster?

Chart of the week: start of a strong rally phase for this stock?

My buy note in April at £6.50 was at the start of one of the major upswings.

As I maintain, buying shares ‘for the long pull’ is a lazy – and often fruitless - way to invest. If you had captured just one of those four swings with decent timing as we did, your profits would be far higher than that of the ‘set and forget’ brigade. We have now captured such a gain.

But with the precious metals on everyone’s ‘buy’ list and as a fully paid-up contrarian, I ask: is it time to buck the trend and take some excellent profits?

Indeed, I have been scanning the mainstream media and I have yet to come across a single bearish or neutral take on gold or silver. Everyone is wildly bullish now as they cite the US Federal Reserve (it’s always them!) which they claim is hell-bent on destroying the dollar. Recent dollar action certainly has been very bearish, and that allows the erroneous inference that gold (and silver) must continue shooting for the moon.

The longer and stronger a price trend becomes, the more intense bullish feelings become. And the bull run in gold started more than four years ago – long enough to engender the most loving feelings towards it given the doubling of the price! But only since around May of last year has the price taken off like a rocket. This has swept away most of the bears – and exposed that the market is being hugely overbought.

Silver made a major low only in March at $11.40 (£8.75) at the height of the coronavirus market crash.

Biggest fallers during the crash and the shares to buy

It has advanced to an astonishing $26 for a four-month gain of 130%. And, naturally, Fresnillo has followed that trend.

Source: interactive investor. Past performance is not a guide to future performance.

Currently it has met the Fibonacci 50% retrace of the entire bear move off the 2011 top and has also hit the blue support/resistance trendline. Together, these represent powerful resistance.

With the plunging dollar about to reverse sharply higher, I believe, a major headwind for the precious metals has now emerged.

With major gains on long positions from April, I believe it highly prudent to take at least some Fresnillo chips off the table with the market at £12.50. Some may wish to cash them all in. Remember – the first rule of investing is to buy low and then sell high. It is the most difficult rule to obey (in real time) as emotions can confuse.

In April, few had a good word to say about silver or Fresnillo. That was the best time to buy, of course. Now, few have a word to say against them. I rest my case.

For more information about Tramline Traders, or to take a three-week free trial, go to www.tramlinetraders.com.

John Burford is the author of the definitive text on his trading method, Tramline Trading. He is also a freelance contributor and not a direct employee of interactive investor.

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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