With paper gold climbing back to the $1,300 area today, some context for these moves is in order. In my article from early October (Bear Raid Sirens Sounding For Gold And Silver – How A Precious Metals Enthusiast Responds) tracking that ugly red candle during the week-long market holiday in China I wrote the following:
Is the bull market over?
What should I do?
You should do what you do whenever something you want goes on sale: buy. Nothing about the investment thesis for gold and silver has changed. Even if risk parity funds are forced to unload low volatility and countercyclical assets in order to compensate for leverage in other asset classes creating a bizarre scenario where risk off doesn’t mean what it usually does, the case for precious metals due to global risks is only growing stronger. In other words, don’t get shook out because of some algorithm driven asset reallocation breakdown that has absolutely nothing to do with the bigger picture. If this makes you want to sell, then you should check your conviction in the original thesis. Don’t get flushed. The weak hands always get forced out before the real move can begin.
I have a feeling that the $1,250 price area is going to look like an incredible buy in a relatively short time. Because the price action is still controlled, we’ll need to see some more constructive action. Silver looks even stronger and has demonstrated the potential to move upward with purpose during this nascent bull market for the precious metals in 2016:
A mirror of the follow through move after the Brexit vote is looking like more of a possibility every day with the drip of politically significant information turning into a pour. My expectation is that it will turn into a torrent before the election next week. The end results are anyone’s guess, but between the background circumstances and the Fed we’re looking at some potentially ferocious immediate catalysts.
Explosive moves to the upside are difficult to predict and usually don’t play out as expected. In fact, one of the curious attributes about price moves is that they are the most severe when they are almost universally unexpected. The best trades in terms of speedy value appreciation that aren’t executed with illegal insider information – unless you’re in Congress in which case you’re not beholden to such plebeian restrictions – are the ones that go against the grain and catch the vast majority flatfooted.
Keep in mind that we are in an unprecedented season. There is nothing new under the sun, but in my lifetime there has never been anything even remotely close to the current environment. Everything is seemingly up for grabs, and in this case a disjointed transition in perception following major structural events could lead to fireworks. Keep in mind that Trump has a slim lead in polls that sample 10 percentage points more Democrats than Republicans – if those labels even matter anymore.
The stock and bond markets look precarious here as well. If we knife through the bottom of this narrow range we’re looking at some major air pockets because of the artificial way that markets were rescued after Brexit and after the rate hike correction that persisted until February of this year:
I’m waiting and watching. I’ve been out of long-biased stocks for a couple years now and haven’t missed out on any gains. With everyone waiting for massive imminent catalysts with the potential for drastic levels of uncertainty, I’m content to sit on my precious metals and be patient.
The real hard part of this is going to be letting it run when it gets going if you’re in from good prices and are looking at substantial paper gains. Remember, paper gains are just paper. Your plan for how you exit is more important than how you enter. Hang tight for now.