Precious Metals Whacked By Grim Goldilocks

January 21, 2011
By

In last week’s global macro notes we noted that precious metals were looking tired.

That observation was followed up with an immediate decision to go short (via the four instruments in the chart above).

The following time-stamped commentary is reproduced verbatim from the Live Feed archives:

01/14 Pre-Open

8:53 am – January 14, 2011

China raised reserve requirements, S&P futures are trading in the red, and the CPI (Consumer Price Index) came in above expectations — but the real story is gold and silver, both of which are getting crushed. Gold futures are down more than $20 per ounce as of this writing, silver futures more than 80 cents.

The action in precious metals is ominous. Just recently an overboisterous analyst drew attention for saying it was “insanity” not to own gold. Meanwhile, precious metals should have seen a stronger boost from the sharp reversal in the $USD — the fact that they did not was a telling sign.

As Paul Volcker leaves Washington, a new J.P. Morgan man (Bill Daley) is stepping in to run the White House. The perception in Europe is that, with the help of Chinese bail-out funds, the eurozone will hold together a bit longer. The Fed is getting its paper asset boom… the bankers appear to have “won.”

It may be that professional traders are witnessing all this and electing to dump precious metals over the side. That is certainly what the price action suggests (see today’s charts). Our new setups today are all expressions of a short precious metals theme for one main reason — if professionals are selling precious metals now, a huge tide of retail related selling could follow. Gold and silver related names look extremely vulnerable to ‘weak hands’ pressure if certain psychological thresholds can be broken.

It may seem counterintuitive, but the thrust of opportunity is clear: When the crowd at large is set to be disappointed in a major way, look out below. We are not predicting a flat-out collapse in the price of gold and silver per se, but simply feel the reward to risk is well worth a trade.

It took a few days, but the break came shortly after. On Thursday Jan 20th there were ugly downside gaps all across the complex.

So what next for gold and silver? We are not long-term bears. But we do think the “Grim Goldilocks” scenario has good potential as a swing trade…

In short (no pun intended), Grim Goldilocks is our offhand summation of the following observations, none of which are positive for precious metals:

  • U.S. economic conditions are ugly but improving. There is a general consensus that the U.S. is enjoying a slow but intact recovery. “Cautiously optimistic” is a fair description of the portfolio manager mindset.
  • The eurozone crisis is seen as contained. As others have observed, Europe is extremely good at “kicking the can down the road.” China has helped them kick that can with a portion of its ample reserves — a move that further serves China by keeping the euro strong against the yuan.
  • Western world inflation is seen as a non-event. There is a mood of complacency in respect to rising food and energy prices. As expressed in Pondering the High Cost of Food, we think this complacency is foolish and maybe a little nuts. But it is what it is.
  • Emerging market inflation is a negative for precious metals. While few are worried about “non-core” inflation in the West, inflation in various emerging markets has led to planned rate hikes and a series of rate hikes in progress. Higher interest rates offer more competition for emerging market savings. At the same time, higher food and energy costs reduce the amount of E.M. savings available for silver and gold purchases.

To be clear, we are NOT long-term bearish on gold and silver. No need for die-hard bulls to lecture on all the reasons gold will soon surpass $2,000 per ounce, silver $50 per ounce, and so on. We know these arguments well. A recent Marketwatch piece, China buys gold and the world follows, also did a fair job of reiterating the bullish case.

That is why we stress this idea is “good for a trade” — a confluence of near to medium term factors regarding fundamentals, technicals and sentiment that all augur poorly for the precious metals complex.

As usual we employ strict risk management discipline — a standard practice — and at some point we will again become buyers of precious metals when the time is right.


Like this article? Share!

Leave a Reply

Your email address will not be published.


Current ye@r *