Precious Metals: Time To Be Courageous While Others Are Fearful?

Includes: GLD, IAU, SLV
by: Harold Sultan

Recently, I wrote an article regarding SLV's strong support at 22. Some time has passed and this threshold has in fact held its ground (at least so far). In this article we revisit the state of affairs and present what seems to be a bullish case for both gold (GLD; IAU) and silver (NYSEARCA:SLV). While there may be some room for the consideration of one of the metals over the other such as gold/silver ratios, these kind of trades are generally more micro in nature, and outside the scope of this article. Instead in the current article we will focus on macro fundamental type factors which present a bullish case for precious metals as a whole.

Sentiment change

During the recent pullback in gold and silver a month ago, as to be expected the reaction was what now with the passing of time seems to have been a pretty harsh overreaction. There was the "this was the necessary correction…in fact the metals are still overvalued and have more room to fall" camp, as well as the even more extreme, "there is no longer any reason to fear inflation…in fact even QE forever isn't causing inflation, so it only makes sense that precious metals no longer serve a real purpose" camp.

Now that some time has passed and the support of 22 for SLV (and similarly, although with seemingly a little more of a question in light of Fridays small sell off, for IAU around 14 and GLD around 140), at least it seems we can all agree that the later sentiment of the precious metals no longer serving any economic purpose and inflation is no longer going to be an issue in our future theory has been debunked. All in all, the current sentiment on the metals is that of a skeptical calm. In some sense, this is exactly what an investor should be looking for. If you wait until sentiment is positive, then you can be sure you waited too long. On the other hand if you exit when everyone is panicking, then you can be sure you exited too early. The following graphic from Bloomberg comparing the current prices of gold to the prices of gold in the 70's is too good to ignore.

Click to enlarge

Debt Ceiling

This past week, Fannie Mae paid the government a one time payment of 60B in the form of dividends on its bailout. This payment, has given the government a little of an extension on its deadline to deal with the debt ceiling. While in some sense this would seem to be a good thing, in reality, it appears that this extra time is only having the effect of making the politicians on both sides more obstinate as their sense of urgency dissipates. (I want to keep this article apolitical, so I will remain as neutral as possible. As an aside I actually have no favorite in this democrat/republican feud as personally I am strongly Libertarian.) In fact, this extra time has allowed both sides to entrench their own agenda even deeper through the creation of self serving legislation, policy, and public lobbying.

In any event, the next fiscal cliff negotiation has the potential to be pretty nasty. Last time, the can was kicked down the road for a half a year. This time even getting that mildly successful outcome is looking even fainter. In any event fears surrounding these issues may give investors another reason to consider retreating back to the precious metals.

Physical demand:

I noted in my last article that the demand for the physical precious metals was extremely strong. In the time that has passed this has only grown more true. In fact, people are buying physical gold in masses even when it is being sold at a hefty premium (25$ an ounce). Moreover, the mint recently had to suspend the sale of some gold coins due to the overwhelming demand. In the end of the day the big players and the market determines the price of the metals, but at some point the absurdity of the growing incongruence between the markets price for the metals and the demand for it physically have to reach an equilibrium, and personally I think it's more likely that fickle Wall Street will flinch first before humankind's prehistoric affinity for the shiny metals completely wavers.


If you already own gold or silver my recommendation is to stay put. Looking at the graphic above comparing the current market to that of the 70's the last thing you want to do is sell right near the bottom. On the other hand, if you are a reader who is considering initiating an investment, I recommend starting with a small investment, and adding to it slowly over time. This will allow you to reduce risk and possibly get in at a lower price if we see further carnage in the near future. Another option for a more sophisticated investor to sell short term out of the money puts in the amount of shares that you are comfortable owning in the event of a future price drop.

Disclosure: I am long SLV, IAU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.