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How Smart Money Gains An Edge In Gold And Silver Investing

Smart money always has an edge in precious metal investing because they know more, have better resources and have better indicators.  It is not uncommon for smart money to profit at the expense of an average investor. 

With some effort, you can also gain an edge.  Let me show you how to start on the journey of gaining an edge.

Famous Billionaire Sells Gold

There were two main triggers for gold to take off in the beginning of 2016.  One of them was news of famous billionaire George Soros buying gold. Less informed investors bought aggressively on the news.

Soros has now sold gold by reducing his holdings in gold ETF (GLD) from 1.05 million shares to 240K shares.

Soros has also reduced his holdings in gold miner Barrick Gold (ABX) to 1.07 million shares from 22.9 million shares.  Soros has also sold silver miner Silver Wheaton (SLW).

Momo crowd aggressively bought gold on the news based on a highly twisted conspiracy theory.  However, algorithms at The Arora Report detected smart money aggressively selling gold into the rally around $1,363 driving gold to $1,348.

I have previously written on Forbes why buying gold after Soros is foolish.  I encourage investors to read that article as it provides insights  that an average investor does not possess and it also provides background for what you are about to read.

The fundamental backdrop for gold has not changed since Soros bought gold.  Why is he selling now?  What does he know that an average investor does not know? Let us explore together.

Two Rudimentary Truths

The first rudimentary truth is that if you know what everyone else knows, you have no edge. 

The second rudimentary truth is that without an edge, unless you get lucky, you are not likely to make significant profits.

How To Gain An Edge

To gain an edge you have to know something that is either not well known or you know how to apply well known information in a different way to get better insights.

Next I am going to illustrate the point with an example that you can easily use in your investing to gain an edge. 

Let us start by looking at a chart of weekly initial jobless claims.

Click here to see an annotated chart of weekly initial jobless claims.

The main driver of gold right now is its safe haven status against economic catastrophe.  One of the classic mistakes precious metal investors make is that they read only what supports their view point.  In contrast, smart money takes a careful look at everything that challenges their view point. 

The data on the chart contradicts the idea of economic catastrophe and the United States going to negative interest rates. The chart shows that the employment picture in the U. S. has improved for the longest stretch since 1973. This observation is based on a moving average of new jobless claims staying below 300,000 for 74 weeks in a row. In our adaptive market-timing model at The Arora Report, we use the 300,000 level as a threshold.

The other observation from the chart is that weekly initial jobless claims are now lower than the lows experienced during the boom time before the Great Recession. The lower the number is, the better it is for the economy. A lower number means a smaller number of workers filing for unemployment. Fewer layoffs indicate a strong economy.

No wonder Soros is selling gold.

Where The Advantages Lie

Investors' real concern is what will happen next. An advantage of watching the initial-jobless-claims number is that it is a leading economic indicator. In plain English, it foretells what will happen to the economy and not what happened in the past like many other indicators.

Another advantage of initial jobless claims is that this number is updated on a weekly basis in contrast to the unemployment rate, which is updated on a monthly basis. For this reason, this number carries a heavy weight in our market-timing model; automatically changing weights are used to change the model to respond to current conditions.

The Take Away

The take away is not that you sell gold if it is a very long-term holding in a prudent allocation to your overall portfolio.  The take away is that it is too early to back up the truck and buy gold and silver from a risk reward perspective, buying a small quantity is fine..

There are many similar indicators that give you an edge.  Of course, my long-term readers know well that The Arora Report gave a signal to back up the truck and buy gold when it was in $600s, sold half of it at $1904 right at the top and the remaining half at $1757.  We also allocated 20% of our portfolio to silver when it was $17 range prior to the big run-up and sold it around $50. 

The point is that we are not afraid of giving a signal to back up the truck and buy precious metals when the conditions are right.

Current Ratings On Gold And Silver

Here are our current ratings from The Arora Report precious metals algorithms.

  • Suspended in the very, very short-term, a lot depends upon Chinese day traders. There is simply not enough data to rigorously model their behavior.

  • Suspended in the very short-term, a lot depends upon Chinese day traders. There is simply not enough data to rigorously model their behavior.

  • Neutral in the short-term. 

  • Negative in the medium-term.

  • Mild Positive in the long-term.

  • Positive in the very long-term.

Inputs to algorithms include technicals, relationship between currencies, interest rates, sentiment, money supply, global geopolitical picture, global GDP growth, inflation in key countries, leading indicators of inflation, risk appetite, etc. 

Some of the inputs are adaptive, i.e., their weight changes based on conditions and co-relations. The adaptive nature of the algorithm has been the most important reason behind consistently accurate calls on gold and silver by The Arora Report over the years.  Experience has shown that algorithms that are static stop working after a while because market conditions change.   For this reason, investors and traders should avoid algorithms that are fixed.

These ratings are reviewed daily and changed frequently for subscribers to The Arora Report to help both long-term investors and short-term traders.  These ratings are used by bullion dealers, jewelers and investors across the globe.  For definition of time frames, please click here.

Full Disclosure: As appropriate, subscribers to The Arora Report are provided precise buy zones and sell zones as appropriate.  Further, subscribers to The Arora Report may undertake short-term trading positions in addition to the very long-term generational opportunities.

By Nigam Arora
Chief Investment Officer



Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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