Ladies and gentlemen, it’s been quite a week for asset classes around the globe. Various sharp reactions have rippled across several continents. Severe reversals in equities, bonds, currencies, and precious metals stumped forecasters and created dislocations even more vast than the prior teetering imbalances.
Here’s the current narrative: after plummeting overnight as Trump’s election became reality and the futures went limit down, a dramatic rush higher occurred as everyone suddenly realized that in order to rebuild American infrastructure, cut taxes, and expand the military we would have to have fiscal stimulus and the issuance of massive quantities of new debt. A rotation took place out of technology, healthcare, and other sectors that had led the way in recent years and went into utilities, industrials, and financials.
So why was the market reaction to a rising probability of a Trump victory so negative?
Was it really his victory speech?
Is it really chatter about deregulating Dodd-Frank?
Wasn’t the world supposed to end?
Did everyone all at once decide to jettison the corporate media narrative?
What about all the supposed instability?
While this can be extremely confusing, if you know what to look for you can come up with a much simpler, more cohesive narrative that accurately captures recent dynamics. First, let’s take a look at gold from election night until now:
Quite the set of waterfalls! So how does gold go from $1270 to $1340 and back to $1220 in 72 hours? Taking a step back and a more macro view we can see a couple things taking place. Trump’s election has caused absolute havoc in foreign currencies. This has made the dollar look stronger on a relative basis. Remember, the value of the dollar isn’t measured against anything tangible, but rather against other fiat currencies. With our current, insane monetary structure still operating in the background, when a foreign currency depreciates the value of gold in dollars tends to go down. Go figure.
Another aspect of the recent price action worth noting is the notional value of the paper contracts being sold. Remember, when you see thousands of tons of paper gold being dumped in minutes it means that whoever is selling doesn’t care about the price that they receive. This indicates either forced selling in order to meet other obligations (like funding the propping up of the dollar) or a deliberate tactic to wash out the bids and set the price lower (manipulation that Deutsche Bank recently paid a fine to resolve). When you see several years worth of gold mining capacity being sold in an hour, you’re watching fraud and price suppression live.
But surely if it’s really like that someone would do something and hold these people to account?
Perhaps we’d see that if these weren’t the same people holding the current system together and controlling the propagation of what masquerades for justice in our country at present. Maybe systemic rigging in this case is actually evidence of a rigged system…
So what’s a precious metals enthusiast to do? First, take a look at the daily chart:
See how on election night we peeked above the trendline and almost cut loose to $1400? Apparently there was a next leg up in gold and silver, but it was rather short lived. It’s supremely difficult to deal with scenarios of manipulation without inside info or the skill set of a professional trader.
Gold is still an accumulation play. The lower you can purchase the real thing, the better. Folks in India would beg for this kind of pullback in order to buy more physical at better prices. Gold is still gold. As a personal note, I use these smackdowns as buying opportunities. After building a base of exposure around the $1100 level and adding into the consolidation at $1200 I was scooping up small amounts on the dips to $1300 rather than buying at $1350. When it dropped to $1250 I bought some more, and when we got down to $1225 today I grabbed a chunk.
When you’re accumulating a long term investment and your thesis doesn’t have to play out overnight – even if it can end up doing so – your best approach is to buy consistently when something goes on sale. When you see waterfall selling like this and use it as an opportunity to add to your position, you’re putting yourself in a much better position than those who wait until the upside momentum to buy. Ask anyone who jumped on silver on the way up at $30 and $40 in 2011. Tough to hold on at half the price five years later even though it’s the right move.
I thought gold would have an explosive upside move if Trump surprised. It turns out I was right, but only for a few hours. I’m thankful that the recent action has taken place for me to accumulate. I’ll leave it to my former professional trading colleagues to go long and short and play both sides. That being said, without giving out any investment advice, if you think gold is going up and want to get outrageous returns on that you might consider owning some JNUG (3x Junior Gold Miners Bullish ETF). You’ll still have counterparty risk, but this is about 10-1 leverage on the gold price. Gold up 1% means JNUG up ~10%, but also gold down 1% means JNUG down ~10%.
Whether you play it slow or play it fast, precious metals should be part of your portfolio. Watch the bond market. When the bubbles (stocks, bonds, housing) deflate the real rotation will go into the inverse bubbles (precious metals) created by years and years of horrific monetary policy and price suppression fraud. One day there will be nowhere left to hide except in the real thing. Until then, take intelligent risks and understand your own capacities as an investor.