The Invincible Precious Metal Bears

A year ago today saw one of the largest declines in COMEX gold and silver futures in the last several decades. For those who argued that an electronic futures market– where an entire years worth of silver production can be bought or sold in one day– would always and everywhere be able to shrug off strong physical demand and set prices however futures traders saw fit, last April was vindication. Coupled with a soaring stock market, the near destruction of the gold and silver bulls sent a powerful message to small savers: invest with Wall Street, or else.

Just last week, during an interview with Michael Lewis, author of “Flash Boys–” (a book about High Frequency Trading) a caller essentially told Lewis that retail investors have no other place to put their money than with Wall Street, and implied that Lewis’ negative words for aspects of mainstream stock markets might further dent confidence in the markets and therefore decrease the value of that caller’s stock portfolio. Once again, I saw in action the belief that it is not worth even trying to critique the financial sector, and that it is just not worth it to attempt “alternative” investing, since owning assets outside the system is only for suckers.

As you might imagine, that comment hit a nerve. The attitude that we are all in this together with the Titans of Finance, that our interests are aligned with Wall Street simply because they are powerful, and the notion that savers have no choice but to invest with the same crooks who got us into the 2008 mess, was a bit much for me.

As the gold– and especially- silver prices settle into oblivion, either loathed or ignored by most other investors seeking returns in “the only game in town” (i.e. conventional stocks), it is worth remembering the power of normalcy bias, and the power of the human herd instinct– not to mention the inability of average people to stand apart from powerful authoritarian figures who manipulate or distort reality for their own ends– even when it is actually in the average persons’ interest to run, not walk, away from a casino run only for the well-connected.

I see that the gold/silver ratio has blown out to above 66. In theory, this is not a good sign, since the gold/silver ratio was generally rising over the course of the 1980s and 1990s. On the other hand, it may just be the case that the inverse correlation we are seeing between stocks and precious metals is temporary, and that the disastrous price performance of the 1980s and 1990s will not be revisited on this sector.

Here are some reasons for why this period is different from the secular bear market in precious metals seen roughly 20 years ago:

- Unlike twenty years ago, the US dollar is not rallying, but is at best treading water. Remember that in the 1980s, the dollar shot up by somewhere north of 50% at one point. It is difficult to imagine such a scenario occurring in a world where nations like Russia and China are openly calling for diversification away from the dollar.

- Unlike twenty years ago, savers are being stiffed with zero percent interest rates, accompanied with central bankers claiming that we need more –not less– inflation. A case can be made that real interest rates (nominal rate minus the rate of inflation) are negative as we speak, which is normally bullish for gold.

-Unlike twenty years ago, a growing middle class in the Middle East, India, and China could easily absorb all known gold and silver mine supply. That supply can only grow so fast. The price dump of last year only came about after Wall Street firms dumped hundreds of tonnes of ETF gold AND India cracked down on its gold market to defend the rupee. Indian elections are coming up shortly, and some of these draconian measures may be lifted. At any rate, the pace of the collapse of gold demand is the real unsustainable trend, even as many shell-shocked formal bullion bulls throw in the towel and are predicting ever-lower precious metal prices.

I could go on and on regarding the bank bail-in concept, concerns regarding the solvency of public pension funds, attempts being made by certain groups to establish alternative currencies (including but not limited to gold), in addition to the possibility of some sort of meaningful correction in the stock markets, as fundamental drivers for higher metal prices.

At the very least, you may want to recognize that prices do not go down forever, and that the most money is made in a market when everyone is on one side of the trade.

At the moment, the precious metals bears think they are invincible.

I’m not so sure.

 

A Bottomless Gold and Silver Price?

After news of the fourth highest sales figure for silver eagles ever, it is important for any trader, investor, or asset manager not to forget  why silver could mount a serious comeback some day soon. At the moment, you also have a clear choice between buying a deeply oversold asset at a 60% discount, or a choice of buying into a stock market making all time high after all time high, having appreciated nearly three times off of its lows of just five years ago.

Assets do not fall forever, contrary to what some people seem to be saying right now, or implying right now regarding the precious metals sector. Psychologically, it is the easy thing, the understandable thing for traders or investors in the precious metals space– who likely have post-traumatic stress disorder after last year– to project ever lower prices indefinitely for silver or gold.  This habit was also learned during the downturn. All of the people (myself included) who didn’t think there was much chance of silver staying below 30 dollars, or 26 dollars, or 22 dollars for any length of time, were made to eat their words last year.  But don’t fall for the trap of feeling that every rally should be shorted forever, or that every rally will simply follow with a new low. This is the mind game of the market having its way with you.

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Why I Still Believe in Gold and Silver

The correction in gold, silver, and mining shares continues into this week- a correction not necessarily unexpected after this sector was up for most of the past 12 weeks. Still, the correction may rattle the cages of precious metal investors since we are still off roughly 60% from 2011 levels in silver and many of the mining stocks are down even more.

Revisiting my original prediction for 2014, I think this year will mark the end of a three to three and a half year consolidation pattern for the precious metals within a secular bull market. However, I still think that we will make some kind of sloping or sideways bottom over the course of the year, especially in silver. The closest historical comparison for me continues to be the 1968-1971 cyclical bear market in silver, where the white metal was cut in half before embarking on a truly spectacular run to nearly 50 dollars. During that long three and a half year consolidation, however, many former enthusiasts lost their nerve for owning the white metal.

So, yes, consolidations take time, and in the process many, many former bulls will simply move on to other investments (many already have.) It is, after all, the easy thing to do. As an investor/speculator, however, you have to ask yourself whether or not all of the precious metals-positive news was priced into this sector when it peaked in 2011. Is the possibility of significant inflation really priced into gold or silver? Is the possibility of China competing with India as the world’s largest consumer of gold priced in? How about the possibility of huge taxes or bail-ins on savers– or as they are often referred to in officialdom– hoarders? The reality that rising rates are not so much a sign of an improving economy as signs that central banks regret bailing out the super- rich while the real economy stagnates or deteriorates– has this fact been priced into gold and silver? Aren’t many equity bulls mistaking a once in a generation wealth transfer from the real economy to speculators (like themselves) for a genuine economic recovery? And then we have all of the talk that still persists- in spite of attempts to ignore it– regarding certain nations’ (like China and Russia) unhappiness with the U.S. dollar. The U.S dollar does not have to collapse (or even drop more than 10 or 15%) to send investors/speculators scurrying into the perceived safety of gold and silver. Finally, what about efforts– however small- to remonetize gold and silver. Were those efforts fully priced into gold and silver three years ago?

I think you can guess my answer to the above when thinking about the relationship of fundamentals to precious metals prices. At the same time, I can’t comfortably offer you a time-table for when these fundamentals will be properly priced in. This is why people practice some form of diversification, since markets are not only a mind game, but are about getting the timing right.

There will be many out there who read my list of fundamentals and dismiss them as things that might have relevance for the gold and silver price 10 years from now, but not anytime soon. And they could be right.  But if you are on the fence regarding whether or not to put money into a stock market flirting with all time highs after having been up for 5 years, or a precious metals sector that has been left for dead by so many, I would remember that the best investments are those that are made when everyone else thinks you are crazy for making them.

Precious Metals Bull Market Update

As any market veteran will tell you, markets are a mind game. I’m not always sure that everyone appreciates the role of psychology in the investment world–but to ignore the irrational nature of the herds of people involved in speculating on the value of this or that asset is to ignore the reality of the human beast, in my mind.

The issue of the mind games played by and on market participants is particularly relevant as we watch the upward thrust of precious metals and their related equities as we enter the third month of 2014.

The precious metals sector– particularly the stocks- were left for dead, loathed, reviled– and worse– at the end of 2013. And yet, just three short months later, here we are with the metals and the miners having outperformed nearly every asset class as the new year unfolds. This would seem to be exhibit A supporting the case of those who would advocate doing exactly the opposite of what is popular or of what the majority of people in a market thought was going to happen just a couple of months ago.

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Silver Underperforming– Will It Last?

Since the start of 2014, the price of silver has lagged the other precious metals in many ways. Silver has really only kept pace with gold — even as silver is thought of as a leveraged bet on gold prices. Silver has notably underperformed another white metal, palladium, which is currently nearing a 52 week high. The hangover in the silver market from the 2011 price explosion still seems to be persistent, even as silver is up over 10% from its last December lows. Because silver industrial demand is still off from its 2011 peak (though many sources claim it is at least increasing) and with evidence of stockpile increases at places like the COMEX, few are taking seriously the idea that silver will ever retake its former peak of around 50 dollars, let alone move decisively to even higher levels.

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