Gold/Silver: The fork in the road
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
December is finally here, and 2021 is right around the corner. Sorry, I missed writing a Kitco article last Friday, so I want to dig right in this week and give you the insight I see happening behind the scenes. First, if you do not know me, I have worked for some of the world's biggest futures brokerages, ran one of the largest metals trading desks, and dove headfirst into this arena decades ago. I can tell you that we are coming up to one of my favorite seasonal periods for silver. The later part of December until the third week of February gives us some of the most consistent silver trades, returning a profit fourteen of the last fifteen years. If you register for a trial on our Morning Express, we outline the details of the seasonal trades in metals here: The Blue Line Express Two-Week Free Trial Sign up.
A fork in the road is a metaphor; it is a deciding moment in life or history when a significant choice of options is required. While I do not adjust my strategy easily, what I have learned is that I recommend you build a flexible investment portfolio across multiple asset classes. Looking at the particulars on several different metals and commodities, one can see others' outperformance relative to gold, but why? I thought we had a perfect storm, i.e., ultra-low rates, rising debt, a dollar in free fall.
Daily Gold Chart
There are two critical dates and prices that stand out to me in the daily gold chart above. Notice that gold had bottomed in August of 2018 at 1150/oz and peaked in August 2020 at 2089/oz. In the second quarter of 2018, the Real Gross Domestic Product year over year in the United States reached its high of 3.33%, then the next quarter we saw 3.12%. This market the top in growth, top in interest rates, and bottom in gold. Fast forward to Q42019 Real GDP YOY 2.34%, Covid hits, Q12020 Real GDP YOY 0.32%, Q2 Real GDP YOY -9.03%, Q3 Real GDP YOY -2.92% where August marked the top in gold and the bottom of growth, bottom in real interest rates. You want to pay attention to the data and the data rate of change and ask yourself what commodities do well in an increasing growth and interest rate environment.
Daily Dollar Chart
What about the declining dollar and rising inflation? The problem with the dollar is that the correlation to gold had changed over the year. One hundred eighty days ago, the correlation was -0.86 (this means when if the dollar falls, gold goes up), something happened ninety days ago; the correlation flipped to positive. Why did this happen? We will have to do more research on the matter, but now the correlation has become increasingly positive, with the 15-day correlation at .50, meaning if the dollar goes down, gold goes down!
Daily Ten-Year Note Chart
What about inflation expectations? As inflation has been rising, it pushes up real and nominal interest rates pressuring the ten-year note lower. Rising rates caused investors to rotate out of assets that do not achieve a yield, i.e., gold. Looking at the commitment of traders report gold longs has reduced to 70,000 contracts. So, where did these traders go?
Daily Copper Chart
Daily Platinum Chart
Daily Crude Oil Chart
Here is how I see this playing out, silver is going to get the "ok" from its big brother gold to join its new friends platinum, palladium, copper, and crude oil in this rally. As of the past week, silver has outperformed gold multiple times throughout the day; for instance, as of this writing, silver is up 10 cents/oz, and gold is down $5/oz today. If the disconnect happens, the gold/silver ratio should break down, and you will want to remain underweight gold while maintaining your other reflation plays.
When are we getting back into gold? When we get another "fire sale" down to the bottom of the range at 1765/oz, and at that point, we will look for Q32021 and Q42021 call options and micro futures to play the next economic downturn where gold should capture 2300/oz. With 2021 around the corner, we are sending out a complimentary 2021 Futures Calendar & Reference Guide with a limited supply. The guide is your go-to resource for government & industry report dates, contract specifications, futures, and options expiration dates. *Available to U.S. residents only. You can request yours here: Blue Line Futures 2021 Pocket Calendar.