Will Precious Metals Act As A 'Safe Haven' In The Impending S&P 500 Crash?

Includes: GLD, SLV, SPY
by: Avi Gilburt

So, as you may have guessed already from the title, I am expecting a potentially serious correction in the market just around the corner. But, can we "hide out" in the metals during such a decline?

We have all heard the arguments as to why the metals are a "safe haven." And, we have heard reasons as to why they are not a "safe haven." In fact, one has to look no further than the market decline of 2008, and we see that the metals were not immune to the broad market carnage.

So, what does one do? Does one buy metals expecting them to rise during the potential significant downturn in equities I foresee coming around the corner? Will it protect you from declines in the S&P500 of hundreds of points?

Well, let's take a look at 2007-2009 in a bit more detail, and see if we can glean anything from the metals action in relation to the equities.

We all know that the S&P500 topped in October of 2007 and began an estimated 300 point decline into March of 2008, and then we saw a corrective bounce in the equities for a couple of months. During that same period of time, the metals rallied. So, here we supposedly have evidence of the metals supposedly acting as a "safe haven."

But, when we then look towards the May 2008 - March 2009 severe decline in the market, what we witnessed was the metals also experiencing significant declines. So, when one is presented with these facts, does it make sense that the metals are really a "safe haven?"

I seriously hope you can all put aside your personal biases towards the metals, and recognize that they are not necessarily a safe haven all the time. The big question is "when are they a safe haven?"

Oddly enough, my answer is simply that they are not the true "safe haven" in which everyone so desperately wants to believe. Yes, I am sure many of you are floored by that statement. I know you are likely thinking to yourselves, "Avi has really lost it this time." But, in all honesty, how can you consider them a safe haven if you have truly come to terms with the reality of how they reacted during the 2008 broad market carnage? And, if you attempt to claim that they are a safe haven sometimes and not at other times, then they are not really a "safe haven" when you need to always rely upon them. So, how do you know when they will be a "safe haven," and when they will not? In my humble opinion, you will be purely guessing.

So, rather than consider them a safe haven, I propose you view them as only driven by sentiment. When sentiment towards the metals are near a pattern low, and we are heading into a fear-driven event, that is the optimal time to use the metals for protection. And, if you take it another step further, you will recognize that there are possible times even within a deflationary period where metals would serve as protection for a period of time, as well as times within inflationary periods where they would not. In fact, would this not explain why the metals served as seeming "protection" during certain parts of the decline in 2007-2008 and not in others?

So, again, it all leads back to where we are within the pattern of public sentiment which will tell us if the metals can be used for safety purposes or not. And, this now leads me to the discussion of whether you should use the metals in the potentially severe upcoming market downturn around the corner.

As I mentioned last weekend, under my ideal scenario, the metals will be hitting their respective bottoms at the end of October, which is a minimum of 112 in GLD and the ideal target region of 98, and a minimum target of 17.76 in the silver futures. If that is the case, then the metals will likely be the place to put your money during the upcoming stock market decline.

However, if the metals do not continue down into the end of October, but, rather, see another corrective rally higher starting this coming week, then the metals will likely come down along with the market for a period of time. In fact, it may turn out in the complete opposite manner that we saw in 2008. This time, the metals may drop with the market initially, and then run opposite the market once they hit their respective bottoming targets.

So, in the upcoming week, I am going to analyze the metals based off the GLD chart, since it seems to be the clearer of the two charts to base our decisions upon. As you can see from the attached chart, GLD came right to the first target box region we have been looking for since we hit our 138 region target, exited long positions, and began shorting GLD. In fact, we even had the opportunity for a quick long trade we entered the morning before the last Fed announcement, which we exited the next day and then resumed our focus on the downside in our Trading Room at Elliottwavetrader.net.

If GLD can strongly break down below the Fibonacci confluence cluster of 119/120 and remain below 123, then we can very well see a waterfall event which will take GLD down to our next target in the 112 region. If we are able to hit that region and consolidate for a week or so between 112 and 117, then we will likely head down to the 98 region the following week. If this occurs by the end of October, then the metals would be a strong buy whether you want to view them as a safe haven or not.

However, if the 119/120 region is maintained as support, this can spark a rally back to the 129 region, and even take GLD all the way back to the low 140's. It is from this region we will likely short it once again for our lower targets cited above.

So, the early part of the upcoming week will prove quite eventful based upon what I am expecting.

Disclosure: I am long SLV. 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.

Additional disclosure: I also own intermediate term puts to trade for this decline.