CEF: Calling A Bottom In Metals

Summary

• Technical analysis suggests we may have "bottomed" in metals.
• Fundamental analysis continues to support long-term ownership of gold/silver.
• The CEF is a great vehicle to gain exposure to both physical gold and silver.
• Looking for more investing ideas like this one? Get them exclusively at Macro Trading Factory. Get started today »

Thesis Summary

In the last few weeks, we have seen silver and gold slowly meandering with no real sense of direction. It looks to me like this is a "bullish consolidation", and within the next few weeks, months, and even years, I am expecting much higher levels from both gold and silver. For lack of a better term, I am "calling the bottom" on metals and believe this is a great place to add to your position. In this article, I discuss why and how to gain exposure to the metals if you haven't already.

Source: Commoditytrademantra.com

Technical analysis

While I rarely dabble in technical analysis, it can be very helpful to identify key turning points. If done well, and coupled with the correct fundamental analysis, it can help us identify "low-risk" entry points. Below, we can see the latest price action in gold and silver.

Source: Tradingview

The above charts show the price movements in silver and gold dating as far back as mid-August. While the two metals don't necessarily trade in sync, we can see essentially the same structures developing on both.

Our area of concern starts on the 24th of September, which is when we saw the metals reach a low of sorts, following what was a tremendous rally in the months of July-August. Since then, both gold and silver have been meandering with no real direction. We can identify, in my opinion, an initial move up to around $1,925 gold and $26 silver, followed by a classic A-B-C corrective structure.

I believe both gold and silver may have bottomed on Friday the 30th, essentially retesting the September levels. A test which, as of writing this on Monday, they have passed with flying colors. Both gold and silver are up a good +1%, and we can now see the MACD start to turn up.

The trading implications are simple enough. This level provides a good entry point for what could be the next stretch up in metals. This analysis could be invalidated if we saw gold and silver fall below their previous September lows. If that is the case, we can easily reassess the technical outlook, and even exit the position at only a small loss.

Fundamentals haven't changed

Having said this, even if we do see lower prices in silver and gold, I'd consider this an opportunity to further add to a position that I intend to hold long term. The fundamentals on the matter haven't changed at all.

Even as the stock market and the economy continue to head in the right direction, I expect gold and silver will continue their rise up. The belief that gold only shines in bad times is mistaken, as we already saw in the rally leading up to the 2008 financial crisis. Furthermore, what we have now is a perfect recipe for higher gold and silver.

First off, the world continues to acquire debt relentlessly. In fact, we are now more indebted than ever.

Source: Medium.com

The United States is not the worst, but it is up there with the big boys. To say that the world is addicted to debt is an understatement. The whole financial system right now is being held by the unprecedented actions of the Federal Reserve and other central banks. It is very unlikely that these institutions can "normalize" their policy without a significant shock to the economy. Most likely, in the form of inflation.

No country with the power to print their own money will default on their debt. And, in fact, it seems to now be a Federal Reserve policy to not even allow corporations to default on their debt. The only way out, therefore, is inflation. In fact, the Federal Reserve has already come out saying it would welcome "higher than normal" inflation.

Inflation will come eventually, but in the meantime, even if we see more deflation, there is no reason to believe gold won't continue to shine. Economist Roy Jastram analyzed the change in the purchasing power of gold during deflation and found that between 1814 and 1839, while prices fell 50%, gold's purchasing power increased 100%.

The bottom line is this. The world is buried in debt, and gold is ultimately the only form of money that can extinguish the debt. Currency today is formed out of debt. When the world finally realizes it has too much of it, gold will be the only place left to go.

Investing in gold and silver the right way

Hopefully, I have provided above a compelling investment thesis through both technical and fundamental analysis. By now, I take it you are one of two potential readers. Either you already have a position in gold and silver and agree with most of what has been said or you are on the fence about investing in gold and silver. There are many different ways of gaining exposure to the metals complex, and I'd like to discuss some options here.

The main two ways of getting exposure to the gold/silver price are investing in mining companies or out and out buying gold. I covered the difference between these two in my article on Barrick Gold Corporation (GOLD). Suffice to say that miners are more speculative investments and have not always on the whole outperformed gold/silver. For this reason, I believe investing in gold and silver directly is a wiser choice at this time. One of the best ways to do so is through the Sprott Physical Gold and Silver Trust (NYSEARCA:CEF).

Starting with a bit of background, CEF started back in 2017 and is based in Canada. CEF is a trust which invests all of its assets into gold and silver. Currently, it has about 66% gold and 33% silver. That's essentially it. The process is simple, and simplicity is what we are looking for here.

There are a few things that make CEF a great vehicle for novices trying to get started in metals investing. First off, as mentioned above, the trust literally buys and stores gold and silver. This is very important because many of the ETFs and funds out there may have exposure to the price of gold/silver, but not actually own any gold/silver. This sets CEF apart and takes me to my second point, which is that CEF shares can be exchanged for actual gold and silver. You may ask the trust every month to actually send you the precious metals. This puts CEF holders in a great position because you own gold/silver, don't have to keep and store it, but have the option to do so very easily. Lastly, CEF is a liquid investment, and shares can be easily bought on the New York Stock Exchange. CEF is perhaps one of the best, easiest and cheapest to own gold and silver.

Source: Cefconnect.com

On a final note, the fund is currently trading at a discount to its NAV, which leads me to believe the fund could even outperform gold and silver. The 66% and 33% allocation strikes a good balance between gold and silver ownership, although, in the coming months, we could expect silver to outperform gold. There are a few reasons for this, which I discussed in depth here. Silver has more industrial uses and the lower overall price could render it more practical to lower-income investors.

Takeaway

CEF is a great vehicle to invest in gold/silver and now is a great time to start a position. It is one of the few funds that actually own the physical metal, which makes it very different from other funds/ETFs. In fact, given the great level of convenience the fund has, we could see shares of CEF trade at a premium in the coming years. For the more seasoned metals investors, other vehicles, such as levered gold/silver ETFs could deliver even higher rewards, something which we discuss in more depth at the Macro Trading Factory.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.