Precious Metals: Risk Management to Opportunity

What Has Been

A solid 2.5 years of risk management (to varying degrees) has been required of precious metals investors.  It was most intensely required after the announcement of QE3, when the net commercial short position in silver began a relentless march toward a very bearish alignment in late 2012 and then the HUI Gold Bugs index lost an important support level at around 460.  Here is the chart of silver with a heavy commercial net short position from NFTRH 215, dated 12.2.12:


As for the HUI, NFTRH 215 also noted this on 12.2.12:

"As you know, NFTRH had been contentedly managing a "normal" and expected decline
in HUI to the support zone (460 area) defined as the neckline to the 2011 topping pattern
that I thought could be a great buying opportunity. No sir, care to try again?"

The sharp rally into and through the QE3 announcement corrected as expected to the 460 critical support area.  What was unexpected was the utter failure at this support zone.  In the financial markets, always have some level of expectation for the unexpected and always be ready to manage risk against it.  We have been doing that ever since.

All through the worst of the precious metals correction we remained on the lookout for signs that the most fervent precious metals bulls had either given up the ship or been forced to walk the plank.  Most recently, a deadly article appeared what seemed like moments after the Fed rolled over on tapering and maintained full QE in September.  For a contrarian gold investor, this was a chilling moment.  Here is the post noting as much:  Scary Gold Bug Article, on Cue.  The article trotted out a veritable who’s who in the gold "community" as if their final vindication and victory had been realized as the Fed declined to taper its bond manipulations.

I happen to believe that gold is a timeless store of monetary value in a world gone monetarily mad.  But these are the financial markets and joining a "community" or cheer leading an ideology can be dangerous.  In reference to the article itself (With a Sling and a Stone) we noted:

"This is the kind of thing that always gets punished.  When the "community" starts congratulating itself for a job well done, a big hit is sure to follow.  Every time."

And so the punishment continued.

What Will Be?

Why do we manage risk?  To be fully intact and ready when it is time to speculate.  We manage risk against nefarious official and quasi official entities maybe, but more than that we manage risk against the herd's perceptions.  In the case of the precious metals the herd has been absolutely obsessed with QE, inflation (money printing) and fears of the dreaded 'taper'.

NFTRH has been awaiting a tapering regime in order to start getting bullish the precious metals.  There are real fundamental reasons for this, some details of which go beyond the scope of this article.  But suffice it to say that the herd and its perceptions have been led astray once again by the evil genius that is the financial markets.  The gold herd has been hoping for more of the thing (QE) that has gone hand in hand with so much pain for the "community".  Or maybe more accurately, the herd has been dreading the thing (QE tapering) that could be its salvation.

Gold bulls should want to see the Fed continue to taper out of the bond manipulation game and if certain gold-favorable Treasury yield spread alignments go along with a decline in our long term 'continuum' (below), opportunity will be at hand.  An added bonus would be most gold advocates either having turned away from their shiny idol that seemingly did not work the way it was supposed to, or quietly sitting in a corner sucking their thumbs, no longer having the stomach for triumphant declarations of victory against the forces of inflationary evil.


Gold bulls and especially gold stock bulls should not fear the deflationary message that a decline in the 30 year yield from the above noted 100 month exponential moving average might portray.  Rather, they should realize that the sector is now firmly counter cyclical and the yield, along with stocks, is cyclical to the growing economy.

Inflation, as represented by the vertical black Monetary Base line below, has gone hand in hand with a cyclical rebound in corporate profits, the stock market and to a lesser extent, the economy itself.


Chart courtesy of SlopeCharts

If upside can continue with the green (profits) and blue (S&P 500) lines in the absence of the black line (which could theoretically decline if the Fed tapers its money printing in service to bond buying) then more power to the Fed and those who unquestioningly jumped into the risk pool at the behest of its policy.  But if money supply starts to ‘taper’ off and profits, the stock market and the economy start to falter then we have… the counter cycle.

The inflation has already been promoted and it has not included the precious metals.  What we have in front of us now as I see it is one of two things:

Thing 1:  The banks become incentivized by the spreads between the ZIRP-pinned Fed Funds and the theoretical rise in long-term yields (again, note the EMA 100 on the TYX chart above) that a 'taper' regime would imply.  This could 'get the money out there' to Main Street, delivering inflation to Mom and Pop.  Inflationists talk about such a phenomenon driving up all sorts of cost of living items including oil.  Unfortunately, inflationists are also talking about strongly rising oil prices as being the fuse to set off gold’s next great moon launch.

One might want to be careful about this line of thinking, especially if one is a gold stock bull because impulsively rising energy costs would not do the miners any good.

Thing 2:  The yield on the 30 year bond above does indeed turn down (with a component of 'sell the [taper] news' baked in?) into a counter cycle, complete with a potential whiff of deflation.  But if short term yields decline in relation to long term yields – which would be expected in a counter cyclical 'risk off' environment, then the stage is set for a real bull phase in the precious metals and most notably, quality mining companies.

There is so much more to write about this subject that is telling its story each week for patient people to interpret.  Having already gotten long-winded, I'll simply note that much of the same ideology that got precious metals boosters into trouble in the first place is still out there making the rounds.  I believe the odds are good that 2014 is going to introduce a macro pivot point that puts most people off sides, whether they be stock market bulls, gold bugs or inflation touts.

NFTRH does not have all the answers, but each week the service (weekly report and 'in-week' updates) refines the difficult questions and signals the markets present to make sure we are in the proper risk mode and ready for opportunity.  Where the precious metals are concerned it has been quite a while since I have been able to talk about opportunity as opposed to risk management.  I’d be most pleased if you consider checking out this quality service with a successful track record as opportunity may be upcoming.

By:Gary Tanashian | Notes From the Rabbit Hole | Free eLetter | Twitter

5 thoughts on “Precious Metals: Risk Management to Opportunity

  1. There are no signs of deflation, nor have there been, ask anyone who lives in the real world who pays day to day living expenses. As for higher rates/end of tapering, the flip side of course is the ending of a negative real interest rate environment, which gold usually thrives in.

  2. In simple terms, what do you mean when you say "2014 is going to introduce a macro pivot point that puts most people off sides"?

    1. In light of tapering, take away the black line on the last chart above and what have we got? A vulnerable SPX, because it and corp. profits have risen in lockstep with policy (and public debt to GDP). In line with this I expect a strong precious metals rally at least, if not a new cyclical bull. Today's employment news did nothing to dissuade the taper regime. Econ strength should bring on the market's own demise eventually. I give it out to mid year for a top to start forming. The question is how out of whack over bullish sentiment can get before the top.

    2. Same question:
      what does "...puts most people off sides..." really mean in plain English?

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