Here’s GDX, 1-hour bar:
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Gold & silver stocks still looking toppy
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Tag Archives: precious metals
Silver
Hard to deny there’s a bearish pattern here:
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The precious metals have ambivalent correlations with stocks these days, so I’m not sure what the above means in the scheme of things, other than the commodities echo bubble slowly deflating. Sometimes the metals are high beta, sometimes negative, and sometimes they seem to have no correlation at all.
Still bearish on the yellow metal
As many readers know, I have been bearish on gold lately. I have been buying puts on GLD and GDX and bought more yesterday, though I do have a big chunk of assets in bullion (20x more than in puts). My bullion is not for sale, but I suspect that the reality of deflation and its likely duration has yet to fully sink in, and that we are due for a demoralizing event in the gold market.
Gold is not fully treated as money at the moment, though fiat currencies don’t satisfy all of the criteria for money either. Only precious metals can fully satisfy them, when governments allow.
So gold is not really money now, since its liquidity is limited, but it is a long-term store of value that outlasts currencies and governments. This is the key point: from the perspective of a large player who can afford warehouse costs, other metals or commodities can also serve as a store of value and hedge against fiscal calamity. Copper and cotton and rice will never go to zero either.
Almost all other commodities are down by huge percentages, though gold hangs on. It makes sense for gold to outperform the others, since it is more liquid and portable and people naturally prefer it during a crisis, but the premium seems way too high.
Once this panic phase of the depression is over, and a general funk and low-velocity environment settles in, with the dollar and other currencies having survived to the surprise of so many gold owners, the metal could be again seen as dead weight and fall as people still need plain old folding money to pay their bills, debts and taxes.
That is how I see things. Only time will tell if I am right.
Silver, platinum, palladium say gold needs to fall.
This spring, as gold topped out at over $1000 per ounce, platinum hit $2250, silver breached $20, and palladium reached $579. The ratios at the time were roughly 1:0.45, 1:50, and 1:1.75, respectively, about where they had been for the last several years.
Here are the five-year charts from Kitco, in order of descending pain:
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I expected gold’s increase in relative value, since the other metals are considered more “risky” assets and depend more on industrial demand, but these ratios are looking a bit extreme. The one that jumps out at me is platinum priced only 10% higher than gold, at a level where gold was trading just two days ago!
With the deflationary carnage that has taken place in the rest of the precious metals (and base metals), gold’s grip on the $800 level is looking more and more tenuous. I have been figuring on $600 for some time, but now I am thinking that $400 is not out of the question. $400 sounds nuts, but there is a massive phase shift underway, in which cash is going from a hot potato to the one thing everyone needs but nobody seems to have.
That said, gold has been increasing in value against everything but dollars and yen, and to a lesser extent, euros, pounds, Swiss francs and some other currencies. It has been acting like a currency in this deflation, though one in need of a correction. In that regard, a fall to $400 would coincide with much more extreme dollar-denominated declines in almost all other assets.
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For more on this shift, see:
Bond sell-off just a correction. Bailouts will not stop deflation.
Breakdown of paper gold market? Maybe not quite yet.
Thought provoking video interview here.
Could we see massive defaults in on futures contracts if a great number of traders decide to arbitrage the paper/retail spread? Sounds possible, but why hasn’t it been done already? Or is it being done, but restrained by a bottleneck at the mints?
There has been a great premium for small physical gold and silver over the futures market for some months now, well in excess of average seignorage. Small players are devouring coins as fast as they are minted.
I have been inclined to take this as a contrary indicator. While adding to my physical on dips, I have been shorting GLD on rallies with puts since March, when surveys showed 98% bullishness on precious metals. Also, the coin and small bar market is very small relative to the world gold market, according to the World Gold Council.
I suspect that the odds of default are still small, in large part because we are in deflation, not inflation, as most gold buyers believe, and many are likely to spook upon that recognition. Also, with everyone going broke, who can afford to bid aggressively on anything anymore?
That said, if larger players start putting away 400 oz bars en masse, watch out. We are now in the final stages of this paper currency system, so not owning gold or waiting for a better price to buy more is a game of musical chairs.
