Metals are not going to stop crashing until the US dollar turns.
I’ve been banging on about that for some time. I don’t know when that will be. Nor does anyone.
But this US dollar action feels like the parabolic blow-off that you get towards the end of bull markets, rather than the creeping disbelief you get at the beginning.
I’m hearing talk of forex interventions coming. That may or may not be so. So I’m not ready to pull the trigger just yet.
But… I’m closely following the price action of two metals that look remarkably cheap. They are silver and platinum. I mentioned them last week.
Platinum looks cheap, regardless of what happens next
The case for platinum, the main use of which is in catalytic converters for diesel engines, is pretty simple. You would normally expect it to trade at a 25% premium to gold. That is the historical average. But demand has been shattered since the Volkswagen emissions scandal of 2015 and the subsequent move away from diesel engines.
Gold is currently at $1,720/oz. If history is any guide, platinum “should” be north of $2,000/oz. It isn’t though. It’s $830.
I don’t really know what’s going to change on the demand side. Platinum may have a major role to play in fuel cells and the hydrogen economy (as a catalyst), but so far this has not been perceived as significant enough to push the price higher.
In any case, here is a 20-year chart of platinum. I’ve drawn a dashed blue line around $780 and you can see the platinum has been below this level just once in almost 20 years – during the Corona panic of March 2020.
It went to $600/oz intraday back then. Otherwise the $770 area has been the floor.
So if you can pick platinum up below $800, let’s just say your downside is likely limited.
And now to the disappointment that is silver
Silver is not quite as clear cut. Oh, silver! How I used to love it back in the noughties. Experience changed my view.
Was there ever a metal with so much potential? Silver is to electronics and modern tech as sugar or salt is to food. It is in just about everything.
Then there is its monetary allure as well. Didn’t silver go to $50 during the inflation of the 1970s? Aren’t you supposed to take refuge in precious metals during inflationary episodes?
Here we are in 2022 and silver has fallen off a cliff. It’s sitting at $18.
For five years between 2015 and 2020 that $19-20 area was resistance. Technical analysis 101 says $19-20 should now be support. But silver – being silver – has cut straight through it.
It went to $12 in the corona panic and $8 in 2008, but the $14 zone has for many years been a pivotal price zone.
Here’s a long-term chart with a dashed line drawn at the $14 mark.
Can it get to $14 on this move? It would be extraordinary, given the amounts of money that have been printed, for it to go that low. There should be some support at $18 and at $16, but it’s silver, so never underestimate its capacity to disappoint.
If the US dollar index goes to 120, a number I’ve been harping on about for months, then silver will get that low. And in a panic it will probably surpass it (if surpass is the right word).
As I say, I’m not quite ready to pull the trigger. My appetite for risk has been somewhat tempered by the market action of recent months. But, as with platinum below $800, your downside is limited buying silver at $14 or below.
When I say buying silver or platinum, I don’t necessarily mean going down to the bullion shop and buying bars, nice though they are. I mean physical metal stored in vaults, ETFs (exchange-traded funds), mining companies, even options or spread betting the price (though these last two are only for the experienced and highly risk-aware, so if you don’t already know how to do it, I suggest you don’t).
If we get to those kinds of levels I’ll put out another piece explaining in more detail some ways to play it. I must say if silver goes to $14 I’m likely to get out the leverage.
But I’m not quite ready to pull the trigger yet. Bottom fishing is a dangerous, and often expensive game. However, silver and platinum are very much coming into the “buy” zone. And at a certain point they will be irresistibly cheap.
I’d say we are nearly there, but not quite yet. Patience…
For those after physical metal, my current recommended bullion dealer in the UK is The Pure Gold Company, whether you are taking delivery or storing online. Premiums are low, quality of service is high. You can deal with a human being. In Ireland it’s Goldcore. Both deliver to the UK, US, Canada and Europe, or you can store your gold with them. I have affiliation deals with both.
Made more money shorting Silver in the last 2 months than I've made being long it over the last 2 years, although I recognise this position is a derivative of a long USD trade. Sadly, because I'm doing it within an ISA and SIPP, this leaves only inverse ETF's as a vehicle to use. I've done it via 3SSI - a triple-leveraged daily short ETF that uses swaps.
This has been a fantastic portfolio hedge in the last 2 weeks, and whilst I wouldn't usually choose a leveraged short ETF to establish a position against a commodity, I recalled how hard and fast Silver bombed in February and March 2020, and decided this would be a good vehicle to try to take advantage of the same thing happening again. Some caveats here:
1. This is a synthetic swap-based ETF so wide open to counterparty risk in the event of a banking crisis.
2. In a choppy market, the time decay caused by the daily swap resets will vapourise your position over an extended time period.
3. When the US Dollar turns, I agree that Silver will most likely catch a bid and you want to be at least 1000 miles away from 3SSI when that happens...
For the time being though, it's a great portfolio hedge - especially if Silver ends up going back to $12.
I recall Julian Brigden accurately calling the turn in both Silver and the USD back in March 2020, so would recommend keeping an eye on the JulianMI2 twitter handle for anybody currently in the long USD trade.
Great trade. Well done Jimbo
Thanks Dominic, although you should probably save the congratulations until after I've closed out. The biggest risk to this trade now, other than a banking crisis, is overstaying my welcome. ;)
Another reason to absolutely love platinum. Per the World Mining Council (or someone of a similar name) the all in production cost of producing platinum is $800-900 an ounce, ignoring low cost russia who come in at the $600s. And these were prices in circa 2018. Adjusting for inflation platinum is trading at or below its effective 'cost'. Precise figures may vary but you get the drift, it effectively gives you a price floor. As far as im concerned this makes it 'risk-free', or at least more risk free than your classical government's version of the same!
https://www.goldpriceforecast.com/explanations/platinum-production-cost/#:~:text=The%20all%2Din%20sustaining%20costs,can't%20go%20on%20indefinitely.
Interesting thanks
I haven't looked at platinum that closely so I will take another look based on the information you have supplied. I have a little silver and gold, and plan to buy some more when I feel it's close to the bottom. I have heard figures of $900 for gold from Harry Dent...surely it can't go that low can it???
Harry Dent has made a lot of forecasts over the years. Some - particularly in the 1990's - were spot on. Most have not been. I have personally learned to be wary of forecasters who are too certain of their own forecasts and themselves. When I think of people who forecast the future as a certainty and have being wrong time and time again, a long list comes to mind. Harry Dent is on it. Even the best forecasters (I include people like Raoul Pal and Julian Brigden in this short list) get things wrong, and it's all about the probabilities. Hedgeye are really good over shorter timescales, but as their CEO Keith McCullough has said on many an occasion, when his trades stop working, it tells him we're in a market regime phase transition and their job is to work out which one is being transitioned to. More here:
https://app.hedgeye.com/insights/102268-chart-of-the-day-expected-values-by-quad-regime?single_item=true
For the avoidance of doubt, we're currently in a Quad 4 market regime as Hedgeye see the World.
Given the current climate of a strengthening USD, if Gold does go to $900 as a result, this implies the US Dollar index (DXY) goes in the direction of 120 and beyond in a big hurry (it's all about rate of change - large jumps catch large investment $$$$s offside, and the shepherds of that capital have to reposition in a panic-induced hurry = volatility rises and asset prices move around with larger amplitudes). If such a move transpires, the Pound will most likely be trading around US Dollar Parity. In this scenario, I would anticipate that UK-based holders of Gold will still find it has proved to be a better protector of their purchasing power than the local currency.
There is a lot more to Gold than the US Dollar price if you hold it and live in a non-US jurisdiction.
I mentioned Harry Dent as he is so sure of that price, and from all of the people I have ever listened to on the future of gold prices there is one thing that I have learned...
Most get things wrong more often than they get things right.
I've bought gold low, I've bought gold high, if it does go low ( I think $900 is unlikely personally), but if it does go lower I'll be buying it on the way down, and holding it on the way back up.
Yeah, he's a little too sure for my liking. Many of these guys get occasional big calls right and are lauded as gurus as a result. However, they are only human, and as fallible as the rest of us when it comes to falling victim to our own bullshit. :)
I couldn't agree more, there have been some pretty wild predictions when it comes to gold prices, and each prediction comes with a huge amount of confidence. Nobody has a crystal ball and looking for 'cycles' is like trying to match waves in the ocean. Heraclitus had it right when stating that you can never step into the same river twice, we are not following any historical pattern with the financial markets...this is all new, but what I would say is that as human beings the same mistakes are being made.
If someone is prepared to make enough guesses then at some point they'll get some right.
Guru?...not in my book, even a fool can get it right sometimes.