The bull market in precious metals

Spot silver reached a two-year high yesterday, and this milestone is deserving of a post in itself. Since 2021, silver has been the ugly step-brother to gold - unloved and underperforming. Those trading silver have had to content with a choppy $18-29 range (fortunately I’ve been net positive trading silver in the Fidenza Macro portfolio).

I went long in the Fidenza Macro portfolio yesterday before silver broke to a new high. Paid subscribers in the Telegram channel were alerted in real time.

With gold making new highs, it was only a matter of time before silver broke the top end of its range. During periods of inflationary monetary policy and cyclical recovery, silver tends to outperform gold. Silver appreciated significantly relative to gold from March 2020 to Feb 2021, and has been in a tightening range since then. If this inflationary boom and commodities bull market continues, I expect the gold/silver cross to break lower.

I had a feeling 2024 would be a big year for silver. In my post “Asymmetric 10x trades for a disinflationary 2024” from Nov 2023, I highlighted silver calls as a potential 10x trade.

Why did I have the confidence yesterday to buy silver in a rising market, after both gold and silver had already been rallying for several days? The answer was in how price was responding to moves in yields. Typically when Treasury yields go up, gold and silver go down. This week we’ve had two strong moves higher in yields, and each time gold and silver either held firm or rallied. The usual correlations between precious metals and the rest of macro have broken down, which is a sign that the trend is being driven by forces more powerful than movements in yields and USD.

Blue - Silver, Yellow - Gold, Red - 10 yr Treasury yields

Add the fact that silver was within shooting distance of long term resistance, and I was willing to bet that it had the momentum to take it out. Buying into a rising market is risky, so I used a tactic that I often reserve for situations when I want to jump on a potentially explosive trend but need to protect my downside if momentum reverses. In this case, I put my stop below the intraday pivot zone of 25.40-50. Worst case scenario, I lose 44c from my entry level. Best case scenario would be that I’d get an early entry into a historic technical breakout, and ride the trend until it gets exhausted.

What exactly is driving precious metals higher anyway? I’ve been theorizing for a while that demand from China is accelerating.

Not only has the central bank been buying gold regularly, but Chinese savers have now turned to precious metals as they have lost faith in real estate and equities as investments. Gavekal attempts to estimate demand from Chinese retail by taking total apparent demand and subtracting central bank purchases.

While there’s no direct data on household investment purchases of gold, the size can be inferred from what’s left over after accounting for those other sources of apparent demand. It is somewhat tricky to account for the central bank’s purchases. The PBOC could purchase domestically produced gold for its reserves, or buy from international sources. But such purchases of “monetary” gold for its reserves would not be recorded in goods trade data, and thus would not add to apparent demand. The assumption made here is that the PBOC’s declared purchases do show up in net imports, while its unofficial purchases do not. Given total apparent demand captured by import data of just north of 2,000 metric tons last year, and deducting PBOC purchases and industrial and jewelry demand, the residual of around 1,000 tons of demand seems logically to be attributable primarily to purchases by households and high-net-worth individuals, on the mainland and in Hong Kong. Admittedly there is a lot of uncertainty over such a residual calculation, but it is unclear where else all those gold imports could be going. There are now multiple channels by which households can invest directly and indirectly in gold, from physical purchases of gold bars and coins, to wealth-management products, exchange-traded funds and gold savings accounts.

Given total apparent demand captured by import data of just north of 2,000 metric tons last year, and deducting PBOC purchases and industrial and jewelry demand, the residual of around 1,000 tons of demand seems logically to be attributable primarily to purchases by households and high-net-worth individuals, on the mainland and in Hong Kong. Admittedly there is a lot of uncertainty over such a residual calculation, but it is unclear where else all those gold imports could be going. There are now multiple channels by which households can invest directly and indirectly in gold, from physical purchases of gold bars and coins, to wealth-management products, exchange-traded funds and gold savings accounts.

For those who are trying to decide whether to own precious metals or crypto as an investment or an allocation in a portfolio, one must consider the relative volatilities of gold vs silver vs bitcoin. Gold is the least volatile, and for that reason, it can be a permanent 10-25% allocation in a portfolio. Silver is not a long term investment in my opinion, and is more useful as a speculative vehicle when it is in a strong uptrend. I am long gold as a long term allocation and also trade gold and silver futures on a leveraged basis.

Bitcoin can be both a long term allocation or a speculative vehicle. Those who are adept at timing the multi-year crypto cycles can generate tremendous wealth loading up on crypto at the bottom and exiting near the top. Those following my blog got the heads up when I turned bullish on Bitcoin at 33200. My tactical trading in Bitcoin has been successful as well, capturing more than 100% of the uptrend while sidestepping the sharp drawdowns. Because of the time-sensitive nature of alerting paid subscribers to the trades, I post these alerts in a Telegram channel for paid subscribers instead of posting them in my blog.

My primer on gold is a must read if you are speculating in precious metals. You can find the links below:

A primer on trading gold, part 1 - fundamental facts and modern history

A primer on gold, part 2 - What drives the price?

A primer on gold, part 3 - gold vs bitcoin

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