The markets got a surprise about 11:15 Tuesday morning that underscored their sensitivity to political hints and trends. As the day wore on, the status of PMs (precious metals and miners) as safe havens and, currently, as value buys was underscored. Yes, the miners too: the best silver companies like Fortuna Silver (NYSE:FSM), First Majestic (NYSE:AG) and Endeavour Silver (NYSE:EXK), profiled here showed gains of 2.41%, 2.89% and 4.22% respectively.
Let's look at the macro context and the performance of PMs as a barometer of the socio-economic and geopolitical weather and for guidance through autumn, fast approaching.
Speaker of the House John Boehner told us early on the holiday weekend that Congress would be in recess and consider the President's request for military intervention in Syria on its return, September 9. But the Speaker must have had some conversations and an overnight conversion late Monday because on Tuesday he announced his support for "the President's call to action." Many others from both parties said intervention should occur. All and sundry were assured that it would be intervention light. The Assad regime would "weather the attack." We and unspecified allies would only "degrade his capabilities" a bit, "no boots on the ground," etc. He will save face, we will save face and things will be neat, tidy and result in democracy.
The indices had opened with a rush. The S&P jumped from its Friday close at 1632 to 1651 at 9:45 on expectations that nothing major would occur for awhile. It trended down a bit and at 11:15 was at 1648.4 when news hit of pending Senate hearings and a full-court press by the administration for action. By 11:30 the S&P hit 1640 and by 2:51pm had made six touches at 1634 till some liquidity injections made for a close at 1638. "Renewed worries about a Syria attack," wrote the Washington Post, "dampened an early rally."
The plan is to stir the pot just a bit, for humanitarian reasons and then to stand back and let progressive forces, "the young, secular, tech-savvy" cadres about whom so much ink has been spilt for 30 months, proceed to an era of peace, freedom and non-violent parliamentary exchange, -- like in Egypt since we ditched Mubarak. The sales pitch is familiar: our action will be quick and cheap, that's the plan. But when you toss a few matches into a pile of firecrackers, as Ronald Reagan had the Navy do near Beirut 31 years ago the consequences can be messy and sad. So the action in the markets Tuesday was a foretaste of volatility to come.
Amid the proclamations and passions one hardly noticed that the 10-year yield climbed back to 2.85%. Everyone servicing debt like adjustable rate mortgages or equity lines knows the stakes for continued QE. In 14 weeks there has been a 75% rise in rates. Debt service is becoming hard and the nominal value of bonds is sinking. The economy and markets are suffering and will suffer more if bonds behave like equities.
The era of stable bond prices and stable income disappeared six years ago and is unlikely soon to return. Another storm-maker is the debate on the debt-ceiling which like many things is now hidden by the cloud of dust the government has chosen to make over Syria. Only four years ago the Secretary of State dined amicably with the latest "Hitler," Bashir Assad and his wife. That datum is pertinent to markets because it indicates the often irrational and shifting agendas of our diplomatic - financial echelons. Recognizing this allows one to adopt a defensive position and select growth areas.
In the markets on the first trading day of September, this context highlighted the value of PMs as a safe haven and, amid other, overbought sectors, a value buy: bullion prices still are far below 1980 inflation-adjusted levels even though demand by investors and industry has increased dramatically. This is especially true for silver which, like silver miners, performed strongly all day. The iShares Silver Trust (NYSEARCA:SLV) rose 3.54% and Sprott Physical Silver (NYSEARCA:PSLV) rose 3.50% while the S&P showed an after-hours gain of .45%. Spider Gold (NYSEARCA:GLD) was up 1.31% while Sprott Physical Gold Trust (NYSEARCA:PHYS) rose 1.20%. The favorite punching bag for most skeptics, Barrick Gold (NYSE:ABX) rose 1.88% which would not surprise the analysts at TD Securities who recently made it a "buy" with a 2013 target of $25.
Perhaps the most important news for commodities including PMs, and for commodity exporting nations like Canada, Australia, Chile and the US was the 2.44% rise of copper (NYSEARCA:JJC), buoyed by China's strong August PMI, its second month of expansion, a trend reversal that carries good short and mid-term news for world economies if Sovereign debt and currency crises can be contained. Nearly all commodities, led by aluminum (NYSEARCA:JJU) +3.09, coal (NYSEARCA:KOL) +2.15, copper miners (NYSEARCA:COPX) +2.87, fertilizers (NYSEARCA:SOIL) +1.13%, natural Gas (NYSEARCA:GAZ) +1.67% and Timber (NYSEARCA:CUT) +1.33%, had strong days with silver the best of all. The only commodity that matched silver's strong day was a similar store of wealth, the Pure Funds Diamond / Gemstone ETF (NYSEARCA:GEMS) at +3.67%. The results show how investors and traders are reading the unstable macro situation. In a bad August for major indices, the only ones to perform well were those in commodity-hungry China, up over 5%.
Regarding concern about equities generally, Doug Short recently discussed the S&P 140-year trend line, noting that we are about 62% above it while the average level (above or below) is about 40%. For those thinking about corrections, regression to average bull market levels would mean an S&P around 1410. Regression to the mean long-term trend line would be S&P 1000. Regression to the major bottoms of 1920, 1932 and 1982 would mean "an S&P falling to the 450-500 range" Short writes. Right now that is unthinkable for most analysts but it suggests that the thesis of a 20% correction to the level of late 4Q 2012 is possible. Cash and commodities look best in this context and by historic trends.
Takeaways: The data from China the past two months and issues on tap in the West and Middle East reinforce two points I have been making since spring: 1) reduce bond allocation. Balance in asset classes is important but there are times to get out of a rip tide. Uncertainty about QE's continuance or its ability to stem rising yields suggests one sell down fixed income so one can buy back, if one needs or chooses to do so, at lower prices. 2) PMs, precious Gems and other commodities including energy are the best plays at present. These sectors are volatile but they are in tune with the times and PMs have enormous upward pressure from rising demand and supply reduced by cutbacks in capex and E & D during the decline from the 2011 highs.
The rise of PMs may be ragged, that is par for the course, but in the flight to safety as currencies waver, yields rise and conflicts heat up, silver and gold will gather strength.
Disclosure: I am long AG, GEMS. 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.