Checking in on Precious Metals

Gold, silver and by extension the miners have gone almost parabolic of late. After taking out its all time highs this week, the shiny metal has returned investors 27% year to date. As has historically occurred during gold bull markets in the past, silver has followed suit in a big way, returning 35% YTD. Such performance has proved gold’s value during economic periods of uncertainty and extreme monetary intervention, with the S&P 500 still negative since the turn of the year. Of the other major equity indices, only the Nasdaq has been able to match the performance of the precious metals and their derivatives, returning roughly 22% thus far.

What’s interesting is the attention the recent outperformance of gold, and especially silver, is continuing to garner from the mainstream financial media, retail investors and the financial Twittersphere. Sentiment towards gold and silver is turning increasingly bullish. A simple Google Trends search will tell you that searches for such terms as “Buy Gold” or “Silver Investment” are equalling their highest readings in a number of years.

What confirms this bullish sentiment is how both large and small speculators are still heavily net long gold, whilst commercials, which is often referred to as the “smart money”, are inversely heavily net short.

Such bullishness by speculators has historically lead to some form of pullback or sideways action over the ensuing weeks. Confirming this cautions behavior by the “smart money” is the level of insider selling by the executives of Newmont Corporation (NEM.NYSE). Newmont is close to the largest of all the gold miners as judged by most metrics. These sales includes those by the CEO, CFO and various other executives of the company. Whilst they only represent very small and perhaps immaterial amounts relative to the executives total holdings in the company, it is likely those running the gold miners have a better grasp of the outlook for gold better than most. My guess is that if any message can be conveyed from these transactions is that the “smart money” is sensing the precious metals have become short-term overbought, and a consolidation or pullback to some extent may be imminent. This is something I have touched on before and what some of the fundamentals (i.e. real rates) are pointing towards.

Tom McClellan opined a similar message in his recent post detailing how historically, such extremes in the three day rate of change for silver (the silver price exceeding its price from three days before by over 10%) has indicated an overbought market:

“Silver traders are not like other traders. They are the hot money, and they can get excited at the wrong times. When they do, it shows up as a blowoff top, like what we are seeing now.”

*Source: Tom McClellan, Mcoscillator.com*

According to Tom, the Gold/Silver ratio is showing a similar warning:

“Big upward spikes in this ratio tend to mark important bottoms for gold (and silver) prices. And big drops in a short period of time usually come about because of silver prices racing up faster than gold prices. Such sharp drops tend to mark important tops for both gold and silver prices.”

Finally, another indicator showing these extreme levels of bullish sentiment is the Gold Miners Bullish Percentage Index (black line below). This indicator shows the percentage of gold mining stocks with “buy” signal. Not only is this indicator maxed out at 100%, but such peaks in the past have again preceded some form of pullback for the miners.

To summarise, it is clear gold and silver have become increasingly overextended of late after what has been a significant rally over the past few weeks. I expect a reversal to some extent is imminent. For mine, the long term fundamentals for the sector and still perhaps the best they have ever been, and thus any significant pullback will likely prompt me to add to my positions.

Update: 11 August 2020

I am significantly reducing my precious metals exposure and taking profits on part of the excellent recent gains. Specifically, I am taking off my SIL and GDXJ positions entirely, and reducing my physical silver and MNRS positions by approximately 50%.

I still hold a significant core holding of physical gold, silver and a smaller holding in the larger miners, however, given the extreme bullish sentiment surrounding precious metals at present (as detailed above) I am increasingly wary that pullback may be imminent. If such a pullback does occur and we see a large part of this bullish sentiment disappear, I will look to become tactically bullish once again. If I am wrong, then my core holdings will continue to do well.

Checking in on Precious Metals

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