Avi Gilburt recently wrote an interesting piece on why it is too early to call a bull market for silver SLV. He makes several good points, but I would like to adjust a few of his assertions in order to provide a balancing argument for precious metals.
He states that it is "Bizzaro-world" when people are bullish on precious metals when tapering looms closer and closer to the fore because QE creates inflation, which drives gold prices up and apparently this is the argument bulls often use to justify price increases in gold. He states that this lack of concern regarding tapering is because bulls believe that the Fed is bluffing. Since QE infinity did not cause a bull run, by extension bulls calling the Fed's bluff should not cause a bull run. Also tapering, if it does occur, should not cause a bull run because then we would see deflation, if anything. Although I agree with his assertion that sentiment is largely to blame for gold and silver prices, I would like to add that there are several fundamental reasons that affect long-term price changes, including the fact that investment banks that had initially called for the gold crash (and got it, thanks to their market power, I mean foresight) have totally changed their minds for the "short-term." They publicly attribute their change of heart almost entirely to the probability that tapering is unlikely to occur.
First off I would like to state that although the Fed is probably bluffing regarding the taper, even if they were not I would say that the taper is a false conundrum that gets played up far too much and given far too much credence for our woes. Let's look at it this way: people buy gold and silver to combat inflation on the one hand and as safety insurance on the other. This extends to central banks as well, by the way. Should a complete taper occur, there is no dispute that there will be a correction in the share market and the bond markets. It is the size of this correction that is disputed, but regardless, precious metals will be purchased in greater quantities to insure against a bad outcome. If the complete taper does not occur, and this would depend on the extent of tapering if at all, gold will continue to be accumulated at the current rate because the case for inflation and a future correction become more extreme.
I agree with his point that one should not blindly follow people with entrenched beliefs regarding a single commodity, but that does not mean that bulls are never right for the right reasons. That belief itself is entrenched in the minds of bears. Personally, I am a bull currently only because the fundamentals support my case. When the fundamentals change I will become a bear, but I refuse to heed any of this sentiment crap for my investment decisions. My portfolio has reflected this entirely because I did not buy gold miners like Sibanye Gold (SBGL), Barrick (ABX), (OTC:HGMCF), Silver Wheaton (SLW), Goldcorp (GG) and Kinross (KGC) until sentiment was extremely bad, where it had promptly decided to get much worse, before finally paying off.
Silver's Lack of a Structured Bottom
He may be right about silver lacking a structured bottom, and I'm going to get a lot of flak for this, but the reason for this was because it was never a real crash. How could it be a crash in gold when ETFs like GLD are sending record quantities to China, for whatever reasons they seem to have. How could it be a crash in silver when demand, for whatever reason silver hoarders seem to have, is at record highs. Even if you did not buy the argument that I had made regarding the lack of real evidence to be bearish about precious metals, physical demand remains what it is, --uninhibited by all this bearish-talk. Further, I believe that the initial decline in gold, and by extension silver, was led by investment banks and had occurred too conveniently. Investment banks that had simply been playing around with the markets to front-run both bulls and bears, especially if you were to look at how quickly JPMorgan and Goldman Sachs have reversed their positions recently -- the very instigators for the initial collapse. A poop-and-scoop followed by a pump-and-dump in the future ...? My solution to speculators is this: either buy and hold until your target is reached, or sell and forget until your target is reached, for whatever reasons you choose. Following the tune of these giants is suicide because you will likely lose on the up and on the down.
Does anybody understand why gold and silver crash at exactly the same time? Surely arbitrage would take some time, even considering algorithmic trading … Look at the time-stamp on those charts below and notice that only the initiation of the price "crash" that had occurred on the 19th appears to have occurred at exactly the same time and followed the same pattern for both metals, while the fluctuations thereafter appear to be much less predictable.
Disclosure: I am long SBGL, SLW, ABX, GG, KGC. 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.