Earlier in the week, several online sources that I follow were convinced that silver and gold were about to implode based on a supposedly bearish Commitment of Traders Report from the CFTC. To a certain subset of gold and silver followers, these reports are taken as gospel proof of a concentrated short side manipulation being undertaken by the Commercial Banks. Leaving aside the issue of whether or not I like the paper precious metals game played at the COMEX (which I don’t), I think it can be dangerous to one’s wealth to read so much into these COT reports. You might have better luck with tarot cards.
The dominant discussion I heard this week was that the increase in the Commercial short position meant that gold and silver were destined to drop, and drop hard. What many of these analysts failed to recognize was that there has been a strong increase in speculator long positions. It is these speculators who are often the ones who drive gold and silver prices higher on the futures exchanges, and it was these speculators who did in fact play a dominant role in the price surge from 2003 to 2011 in silver, as opposed to commercial short covering– even as there was some of that as well toward the end of silver’s cyclical bull move in 2011.
I feel that the silver market is still suffering from the after effects of a brutal three year bear market. Sentiment is still not great; many former bulls in this space have been shocked and stunned into silence. Many theories about dollar collapses or the end of the COMEX were overstated; the prophets of doom and gloom have seemingly been silenced by a stock market that has blown through prior records and made all time high after all time high.
But– and this is the important point— when a market is as oversold, underloved, and underfollowed as silver, you should actually be expecting some big moves to the upside. Recoveries from the kind of oversold positions we have seen with the white metal are normally vertical in nature– and yes I know everyone is tired of the bullish case, but that is precisely my point. At the exact same time that everyone thinks the bears can’t be beaten, the market turns decidedly bullish. Put differently, when a trade or an investment thesis feels easy it is wrong, and when it is difficult or hard to believe, you should back up the truck.
After the price action of the past few sessions, gold is back ahead of the S&P 500 year to date, with gold up roughly 9% and the conventional markets up around 6.5%. The real winners year to date continue to be the junior gold mining stocks: even after today they are still up nearly 30%. According to many, the mining stocks lead the metal and this is one more feather in the cap for the precious metal bulls.
Another piece of constructive news for precious metals bulls comes from an asset that is actually in record territory– when using its average annual price– and that is WTI crude oil. While we are still off of the intraday high hit 6 years ago, we are nonetheless higher than the average price of 2008 for black gold. This fact is not widely reported, and is perhaps the biggest tell regarding the future direction of precious metals prices.
I’ve noticed that the narrative of central bank omnipotence is coming back, coupled with an incredible amount of confidence that foreign policy headaches in Syria, Israel, Ukraine, Afghanistan, and Iraq can just be ignored the way they have been for the last several years. As the complacency builds, and as many continue to ignore the very real possibility of surging oil prices in the months and years ahead, gold and silver may surprise many of us who expected this summer to be a boring one devoid of much action.
The continued sideways, or coiling action in silver futures stands in contrast to some strong upward price action in junior mining stocks. This is one symbol that money may be looking to actually sell high (in terms of stocks and high end real estate) and begin to rotate into the beaten down, left for dead precious metals sector. The fact that Thursday and Friday’s moves in the junior mining stock ETF, GDXJ, occurred on very high volume is a tell that the bear market for all things gold and silver related could be nearing its close.
For its part, silver refused to break down last week below the 18.50 area, which had marked the prior bottom of last year. But the price is still very much on lockdown beneath 20 dollars an ounce. The near record level of complacency in conventional asset markets likewise continues unabated. I think that with time this complacency will find the Fed asleep on the job in terms of fighting the next battle caused by their policies, which for me will be inflation. Oil is stubbornly holding above the 106 area, reportedly because of renewed conflict in the Middle East. But it could just as easily be the case that all of the stimulus pumped into the system these past five years is getting ready to find a home in assets other than those favored by central banks. From a seasonal perspective, as we move through the summer and into fall, we should keep an eye on the price of tangible assets, as they may start to attract more money than some currently think possible.
The news this week that the ECB is going to move interest rates into negative territory is just one more example of something seemingly unthinkable a few years back now not only seeming normal, but in fact becoming the justification for conventional stock markets soaring around the world. I realize that most of us stock market skeptics have had things wrong for too long to remember, but the fundamental fact that central bankers still feel that inflation is too low, coupled with their own belief that they can control, or levitate, markets as they desire, will at some point provoke more fear than greed among speculators. The planners are not invincible, there will always be a tightening, and the law of unintended consequences has not been revoked.
The spokespeople for corporations, mega banks and the government are telling me that the labor picture has recovered to where it was nearly SEVEN years ago, conveniently forgetting to count people who have left the workforce– since we all know Americans save so much that anyone leaving the workforce must be doing so voluntarily. The Orwellian freak show called the “Recovery” continues–hope you enjoy the show.
In the precious metals markets, gold, silver and mining shares are still scraping along the bottom, even as silver coin sales for May were higher than the same period last year, remaining quite strong. Real physical demand for real physical metal continues. Of course it is not the main driver of price. Paper, or electronic speculators maintain a bearish posture that, while not quite a record, is still remarkable, especially given the news from the ECB noted above.
Meanwhile, US equity markets continued to move on up into all-time record territory this week. Bullishness among smaller brokerages and retail investors likewise remains near all time highs, while the VIX, or measure of fear in the markets, nears an all-time low. Yes, this overvalued, overbought, overbullish condition can go on for longer than many of us whining nay-sayers think possible. But, at the same time, facts are stubborn things. It is a fact that this equity market rally is closer to the end than to its the beginning. I’m sure many believe that they know when to get out, or that this time is different. But to me, it never is.
As silver desperately clings to its prior closing low around 18.50 an ounce– and looks set to make a new low soon, its worth revisiting where we are in this cyclical bottoming process. Commodity futures tend to make bottoms in a very sloppy, or complicated fashion. One good parallel in silver’s history is the market from 1987 to 1991, as the price slid from over 9 dollars to 3.60 cents, and even when the market recovered into 1992, it traded in a very wide trading range between about 3.80 and 5.40 an ounce. We could still see weakness into next year in the silver market, but my more important point is that probably over 90% of the price weakness is behind us.
The other important point to keep in mind is that many mining stocks are already well into their fourth year of price declines. I might actually look to the miners to recover first, which is what I thought we were witnessing earlier this year. The mining stocks are fighting to stay positive as we speak. But going back to my analogy to the early 1990s, once the miners finally bottomed, the resulting recovery in many of the precious metals mining stocks exceeded 500%– you would have much rather owned the miners than the underlying bullion. It has been a long time since that has been the case, by the way, as most market participants during this past bull market in the precious metals would have rather owned the bullion, as opposed to the stocks. This may be changing, although bottoming is a process and there probably is no hurry to add to positions in this space, as we head into the summer doldrums, not usually thought of as a positive season for precious metals.