The ongoing European fiscal crisis has recently driven investors to seek the US dollar as a "safe haven" over precious metals. As shown in the chart below, the US Dollar Index is up 5.5% in May and it has been up 20 of the past 22 trading sessions.
Historically, precious metals have been negatively correlated with the US Dollar. This means that if the US dollar goes up, precious metals are likely to go down. That said, gold and silver are down 6.2% and 9.9%, respectively in May. Note that the S&P 500 (SPY) is also down over 6% in May.
Still Bullish On Precious Metals
Despite the recent decline, we are still very bullish on precious metals for the long-run. As a matter of fact, we think both gold and silver are currently trading at very attractive levels and investors should consider adding to their long-term positions.
Our positive bias for precious metals is really driven by our long-term negative bias for the US dollar. The underlying fundamentals of the US economy are still very weak and we think that will eventually lead the US Dollar to depreciate significantly.
First of all, we still have a major debt problem on our hands. Despite diminishing returns from additional debt, policymakers and central bankers continue to leverage the existing playbook for dealing with our debt crisis. Over the last 70 years, each crisis has brought greater stimulus. Current debt levels are simply unsustainable.
In addition, the housing market is still relatively weak in the U.S. As shown in the chart below, home prices are back to levels not seen since late-2002 (based on the Case-Shiller Composite 20 Index).
Adding fuel to the fire, employment growth in the US is beginning to stagnate again, which historically has been negative for the Dollar.
As shown in the chart above, employment growth continues to hover below the magic 200,000 number that signals a strong job market.
Tactical Strategy
We believe that gold and silver are trading at very attractive levels right now and are currently offering investors some low-risk entry points.
SPDR Gold Trust (GLD) is down almost 20% from its peak last September. GLD consolidated in the $145-$155 range (from April 2011 to July 2011) before surging to an all-time high. This level acted as support in December and we believe it will continue to be a strong level of support this time around as well.
iShares Silver Trust (SLV) has been much more volatile than GLD. SLV had a parabolic move higher in 2010 and 2011, finally peaking in April 2011. The stock is now down over 40% from its peak. We have been targeting a $25 price for SLV for over a year now. We added to our position back in December and we will probably add some more this week.
Note: We own gold and silver in physical and ETF forms and . Investors interested in vehicles that retain physical metal should look into Sprott Asset Management's Sprott Physical Gold Trust (PHYS) and Sprott Physical Silver Trust (PSLV).
