The precious metals have just broken out into new highs recently. On March 1, 2011, Gold closed at $1433 USD, an all time high. Silver not to be outdone closed at $34.65 USD, a new high not seen for 31 years. It seems as if a new "Precious Metals Bull Run" is upon us.
At the same time the unrest in the Middle East and North Africa has the price of Brent Crude Oil at $116 USD, a high not seen for 3 years. Both factors of the political unrest and the inflation of prices because of the high oil cost are supportive of the continuing rise in prices for the precious metals.
As the prices for Silver and Gold rise, investors are naturally interested and also concerned. Are the prices rising too fast and has a peak been reached yet? To answer this question, the author takes a glance at the charts and does a comparison of the precious metals miners to the underlying Gold and Silver prices. The chart of the SIL ETF of Silver miners is compared with the SLV ETF of the Silver metal and the GDX ETF of Gold miners, together with the GLD ETF of the Gold metal as in the following:
(Click to enlarge)
The start date for this comparison was November 1, 2010, as that was close to the reaffirmation date of support for the precious metals by the FOMC, when they indicated a further $600 billion of funds for treasury bills purchases. Also that start date gives us the data for the last peak of the precious metals at or about the beginning of this year. The red and green candlesticks are the daily movements of the SIL Silver miners. Note that the SIL candlesticks are compared with the Silver trace, which is the SLV ETF of Silver. As can be seen, the SIL miners are presently underperforming the SLV metal's trace. Note that the green trace represents the GDX Gold miners and it is also underperforming the golden trace, which is the GLD gold metal. In a true Bull Run, the mining equities should lead. Therefore, the quick glance at this chart shows that the mining equities are still underperforming the metals prices and we may surmise from this that a peak has not yet been reached.
Now, this is where critics will say that this is not a true breakout to new highs, as the mining equities are not leading. A quick look backwards in time to the beginning of the year, shows that both the SIL and GDX equities ETFs were on top of the metals traces and were leading the metals at that recent peak in prices. My answer to that is "Not just yet". This is just merely pessimists saying that the cup is half empty, whereas the analysis here is indicating that the cup is only half full presently. Higher prices may be in store for both the precious metal miners and the precious metals.
Presently, the author detects a few pundits calling for a top in the precious metals and saying that they are overbought and a fall in prices is called for. In answer to that, the author proposes a review of the identified factors driving the rise of the precious metals as posted here. Nothing has changed, except that the precious metals prices have risen.
The Rule of 90
What are some others that follow the precious metal's prices saying? Jon, a Gold trader in a note to Gary Tanashian, a noted blogger states:
"The Rule of Ninety? I learned this years ago from one who truly traded for a living and the basis was that anytime a security reached the figure 90 for the very first time as a price then 90% of the time the price would reach 100."
This author has not encountered the "Rule of 90" before, but the underlying assumptions ring true to me. It is a straight forward truth to a trending movement, that the trend should continue if the underlying factors remain and will not deviate until it is affected in some other manner by other factors.
Therefore, as the precious metals are breaking to new highs in the upwards trend, as I've already noted, do not count on this as being the top. The underlying inflationary factors driving precious metals pricing are strong and unchanged. There have been no new world events to counter that thesis. The precious metals should continue to trend higher.
Machiavelli, an ancient strategic thinker, in "The Prince" (Machiavelli) holds that
" As fortune is changeable whereas men are obstinate in their ways, men prosper so long as fortune and policy are in accord, and when there is a clash they fail. I hold strongly to this: that it is better to be impetuous than circumspect."
To paraphrase Machiavelli, the benefits of caution and strategic planning are obvious, however, “impetuous behaviour” is more successful than circumspection. I think perhaps his meaning is that if one is overly cautious, many opportunities can be missed. As the saying goes, fortune favours the bold, and investors, this is a true Precious Metals Bull Run.
Disclosure: The author is long base and precious metals miners.
Disclaimer: The information and opinions contained within this document reflect the personal views of the author and should be viewed as food for thought and amusement only. The author may from time to time have a position in any of the securities mentioned. There are no guarantees of the accuracy, reliability or completeness of the information contained herein. Independent due diligence and discussions with one’s own investment and business advisor is strongly recommended. These writings are not to be construed as an offer or solicitation with respect to the purchase or sale of any security or as an endorsement of any product or service. We do not request or receive compensation in any form in order to feature companies in this publication. It is prohibited to copy or redistribute this document to any type of third party without the express permission of the author. This document may be quoted, in context, provided proper credit is given.