Investing is an art mixed with a bit of science. The latter is debatable these days as most seem to have resolved to gambling, but nonetheless logic and rational do help in making better decisions, or at least keeping one's sanity! Even though clients may think we have some sort of crystal ball, with the dozens of emails received after every tick lower, it has and will continue to always be about risk vs. reward. Back in August, every sell side shop and the media was filled with reports about hyperinflation and how the Silver and Gold physical market was running out. Even the more smarter shops looking at real yields and the broader economic picture, had been pushing precious metals to multiples higher from back in August. What happened to Gold and Silver going to $4000/tonne and $100/oz, pounding the table calls? Surely with Silver down 25% and Gold down 10%, these must look more appealing now, so what has changed?
As typical with human psychology, bulls at the top will always claim "if it falls 5% from here, I am so doubling down", only to then retract all their orders when it actually falls. The Fed was spending $3 trillion just a few months ago, and the balance sheet is still bloated north of $7 trillion. If the past has taught us anything, especially over the decade, is that we cannot live in a world with higher interest rates or a smaller balance sheet. Every problem we get the solution is to throw more money at the problem. Eventually then deflate away the debt by deflating the currency - job well done central banks! So, if inflation was such a bigger concern before, surely these inflation hedges look compelling now.
It all goes back to positioning and the elastic band theory. If everyone gets on one side of the trade, and in this case the inflation theory gets stretched and stretched, it can only go so far when one small thing can snap it right back to the mean. That is how everyone was positioned, long Gold and Silver, and short the dollar in size. It only takes one catalyst or event that can cause a domino effect to cause a portfolio to unwind. The massive short gamma technology options positions delta unwind, the end of summer, and lack of dovishness in Fed Powell finally seemed to have caught up with the tape. The economic data was showing signs of slowing down for months, but investors refused to ignore the deflationary angle which is the Fed's worst fear.
Either way the market is in a bit of a lull it seems for now. Either the Fed needs to do more QE or Congress needs to pass a fiscal stimulus bill to get the recovery going. The momentum is slowing down which is taking down cyclical assets for right reason. One can argue that even with all the money injected, it only finds its way into a handful of assets as it produces more and more zombie companies. Wil there ever be genuine growth or just higher prices as more money is thrown at the problem?
One will never get the timing right but it is important to ask oneself where the next 3-6 months are headed. We all seem to be obsessed with charts and technical analysis. They are not a biblical solution, or the Holy Grail, that will tell you what to do, they only show you where the pitfalls and key sensitive points are "once" a move is in place. But a catalyst is needed to call that trigger. As Gold and Silver tick lower and lower, investors are eagerly watching their charts to give them a clue that will never happen. The magic answer lies in your analysis and forecasts, some work after all. It is all about risk vs. reward and that is what one should consider when looking at the "catching the falling knife" charts. Remember it looked the same back in March, oops!
