All throughout 2020, the world was gripped with panic from the pandemic and the ensuing debt the world would have to endure to repay all the money borrowed (aka, printed). Gold and Silver were added as precious (no pun intended) holdings for any portfolio looking to survive this year. It no longer made sense to just own Equity/Bonds with the 60/40 mix that has worked all throughout the last decade on the back of deflation. We have to assess a new world order portfolio, one which has a careful weighting of Equities, Gold/Silver, Commodities, Convertible Bonds, and some Volatility. This is going to truly be the hedge in the next decade. We know Bonds are dead as an asset class, they will move lower eventually as inflation rears its ugly head, but will be supported by the Fed to keep yields artificially low. So just owning the 60/40 portfolio will not do anyone any good.
Most people think about Gold, and its rather racier brother Silver, as tools used when there is uncertainty/deflation or growth slowdown worries. Be that as it may, but there are also far stronger relationships between Gold and Silver to inflation. Given that globally central banks have printed in excess of $30 trillion in balance sheet expansion, with no end in sight, possibly more, the debt is only going one way, higher. Inflation is matter of when, not if. But what is important to note is that as inflation goes higher, real yields will move lower as the Fed will never allow gross yields to rise much as it may shake the financial system that is fragile anyway. As real yields move higher, which they are now as well, Gold and Silver will both benefit. The lower Dollar also helps, but it seems recently both Gold and Silver have broken away from that relationship as well. What is going on?
Following the U.S. elections rally as Gold got to $1960/oz. and Silver as high as $26.20, they have since retraced about 8% and 11%, respectively. The Gold and Silver Equities have fallen about 20% plus. Over the last three weeks we have had some incredibly good news on the vaccine and it seems the world is closer to finding some sort of relief from this dreaded virus that has killed people, businesses and changed life as we know it. But what this piece of good news did was to ignite an aggressive unwind when now every investor thinks we will have inflation going forward, massive GDP growth, and a Fed that is happy to sit and watch the show. This caused money to go into all the cyclically geared names that had been lagging like Energy, Copper, Iron Ore, Steel - all part of the industrial complex that were strong throughout summer given China's insatiable demand to begin with. The last three weeks has seen a sudden surge higher in Industrial Metals (iShares MSCI Global Metals & Mining Producers ETF (PICK) ) has rallied 20% and the VanEck Vectors Gold Miners ETF (GDX) or the ETFMG Prime Junior Silver Miners ETF (SILJ) index fell 15%. The last two days have just gotten to a level whereby charts are looking parabolic as the street chases Oil names, up 7% everyday, even though the Oil price is still around the $46/bbl. level where it has been since the summer. The move is correct, but the extent of it and timing of it seems debatable.
When charts go parabolic it smells of last minute "late to the party" traders chasing their tails, it smells of FOMO trading. Assets like Bitcoin are rallying on back of Fiat currency debasement as central banks print more, now followed by the racier alt coins, Ripple and Stellar all up 40%+ just in 1 day. Everyone wants to chase everything that has not moved yet, but not knowing why. If we are in a world, where central banks are debasing Fiat currency, and printing more, then why should Silver or Gold be left behind? The same argument holds true then for them as well. It seems the massive unwinding of portfolios into Thanksgiving has caused a reset outside of fundamentals that are driving the space to begin with.
Investing is all about risk vs. reward. It may be right to price in vaccine optimism, but it does not mean the recovery will be in one straight line and in one day. We still have so many logistical hurdles to get through. One may miss the top or the bottom entirely but no one ever killed the trader for taking profits. But one can be fired for chasing the last print literally at a 90-degree angle from one's screens today.
