According to my recent analysis, over the last decade moves in precious metal trading have consistently predicted movements in the U.S. stock market. A primary force determining the leadership role displyed by the metals is global economic growth, which has heightened demand for industrial commodities. Massive populations across Asia, Africa and South America now demand modern technologically advanced devices for which Western economies have grown accustomed to being the only markets. Silver (SLV) is extensively used in batteries, photography, solar energy, water purification, consumer electronics and medical applications. Platinum (PPLT) is used in medical devices, high-tech sensors, automobile production and other sensitive industrial applications.
Demand for gold (GLD) is significantly less than the "white metals" for industrial use, however the yellow metal has regularly outperformed lighter colored counterparts during economic flights to safety. Appreciation in precious metals is largely due to inflation fears from investors worldwide, which have grown substantially throughout the decade that metals have led major asset markets. Gold and silver have grown to account for over 1% of investment portfolios, after bottoming near 0.3% during the Y2K technology bubble. While the only historically sustainable media of exchange remains less expensive than in times of use as legal tender, gold and silver continue to be subject to violent sell offs when optimism overheats or USD deflation takes over. During precious metals' extensive history as a currency, as much as 20% of societal wealth has been stored in gold and silver. At approximately 1% of holdings today, a repatriation to "real money" is far from complete.
With investment demand coming mostly from higher net worth individuals and major instituations such as JPMorgan (JPM), platinum is less affected by retail investment and has lead gold and silver recently over the short term. While the Dow Jones (DIA) currently sits up 1% halfway through trading June 27, precious metals have continued recent slides. Platinum is down $17/oz on the day, gold nearly $9 and silver has sunk over 2% in typically volatile fashion.
Even ignoring prior analysis, it can be said that falling industrial input prices show slack in demand. Silver and platinum are used extensively across high-tech applications. In order to test, and hopefully capitalize on, continued market leadership by precious metals, I added to an existing position in July 2011 $55 QQQ puts June 27. I'll be looking to take profits later this week in at least half the stake, but expect to maintain net short equity exposure via sector specific ETF puts for the foreseeable future as equity markets remain weak.
Disclosure: I am short QQQ.
