Metals Are Just Another Source Of Funds

JC Parets
March 17, 2020

In this type of environment, our focus has been on capital preservation as opposed to capital appreciation.

We've gotten a lot of questions about Metals during this time, so this post will review why we've been out and what would get us involved again.

Let's start with a chart of Gold, which hit our upside target of 44,500 in early March and has since been somebody else's problem. For now, prices are stuck within a 37,000-44,500 range, so there's little reason to be betting aggressively in either direction. If prices do get back down towards 37,000 and you want to take a shot on the long side, that's fine, but below that level we cannot be long as there's risk down towards 32,300.

Click on chart to enlarge view. 

Silver has been another story. In December we were buying this near 44,000 for a trade back up to 49,000, but said that structurally there was no reason to be long if prices were below 49,500. As long as prices were stuck below that overhead supply then there was too much downside risk and opportunity cost...and now we see why.

With prices back towards the bottom of a multi-year range, taking a shot on the long side if prices get back down towards 32,500 makes sense, but if that level breaks then there's risk down towards 24,000 so we need to stay out of the way.

Times like this are a great reminder that most assets, Precious Metals included, are a source of funds when things go south. When volatility goes up, funds need to raise cash to reduce their portfolio's exposure...and when their volatile/illiquid holdings are crashing and they can't get out, they'll sell liquid assets like Metals whether it makes sense fundamentally or not. We can argue all day about whether Gold/Silver are portfolio hedges, but when correlations go to one and funds need to meet their leverage requirements, anything and everything that can be sold is put on the chopping block.

At the end of the day, the best hedge remains cash. If you run out of chips, you can't bet. And if you can't bet, you're out of the game.

Patience continues to work in this volatile environment as we wait for more favorable conditions to develop.

We've unlocked December's Precious Metals premium post that you can understand our research process. We'd encourage you to check it out.

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Thanks for reading and let us know if you have any questions!

Allstarcharts Team

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