At the time of this writing, the price of silver is down over $31/oz (27 percent) on the day, with gold posting losses of $480/oz (8 percent). These are huge losses, growing larger as the sell-off creates its own momentum as markets approach the Friday close. With this historic sell-off during American trading hours, gold is now trading below the $4,900/oz level, with silver trading below $84/oz. These represent the steepest dollar declines in the two metals since 2011, after gold and silver peaked above $1,900/oz and $49.50/oz, respectively.
On September 23, 2011, silver posted a single-day decline of 16.5 percent, with gold sliding by 6 percent on the day. The case of 1980 was even more extreme: on January 22, 1980, gold prices declined by more than 13 percent; a couple of months later, on March 27, 1980, silver prices were slashed in half.
As for today's sell-off, it comes just days after silver and gold set all-time highs (at least nominally), when the metals rose to around $121/oz and $5,600/oz, respectively. Thus, prices for silver and gold are currently around 30 percent and 12 percent off their all-time nominal highs. This places silver well within correction territory, while the metal continues to prove that there are no solid resistance levels (in either direction) above the $50/oz level.
Indeed, after the latest double-top in precious metals, gold and silver prices are officially below key Fibonacci retracement levels, portending increased volatility and downside risk. If we establish baseline lows at $29/oz for silver and $2,000/oz for gold, intraday trading has had silver testing and rebounding off of its midpoint (50 percent), with gold briefly trading below its moderate support level (23.6 percent). This price action around key Fibonacci retracement levels indicates (qualitatively) that, for silver, capitulation is increasing slightly with nervous selling; for gold, a relatively shallow pullback testing minor support, with some profit-taking and minimal capitulation. While these trends are worth monitoring, particularly for their utility in interpreting the psychological implications in the price action, it is vital to acknowledge the limits of technical analysis and to appreciate the bigger picture.
For instance, in the event that the silver spot price tests its 61.8-percent retracement level (around $64/oz) or its 78.6-percent retracement level (under $50/oz), we will be gaining affirmation that capitulation is strengthening, fear-driven selling is increasing, and the short-term prospects for silver are dampened. That is the qualitative significance of each subsequent retracement level: as prices head lower, this is the conviction that is gained. However, it is imperative to distinguish between retracement on a single day and retracement maintained over the period of a week or a month. For this reason, it is important that investors distinguish between the different types of price action: from intraday to daily close to the end of the week, there is more conviction over the longer time periods, and so the shorter timeframes can often hypnotize traders into making mistakes and even seeing signals that aren't really there or don't really carry any weight. As the old adage goes, in the short run, the markets are a voting machine; in the long run, they are a weighing machine.
As for the macro factors at play, I think what’s happening is (first) a coordinated effort by institutional shorts seeking to cover (and to mitigate losses): there is a lot of institutional pressure on silver because of the institutions' substantial short exposure, so it has long been the case that institutional traders will short silver (a relatively small and thus manipulable market) to drive prices lower for improved covering opportunities ahead of closing short positions. This unique ability to drive the price lower means that institutional selling can single-handedly create a cascade of even further selling. Indeed, the event presents as a “correction” but its rapidity and severity reveal a coordinated effort at a “conviction selloff” and a rapid repricing of the metal. A ‘healthy’ correction, on the other hand, is distinguished by aggressive dip buying, failed breakdowns, and quick V-shaped recoveries. ‘Healthy’ and ‘organic’ corrections simply don’t present with such sudden, rapid, and sustained changes in conviction; this kind of event follows exclusively from institutions orchestrating a strategic offloading in order to bring the rally to a halt — with conviction — and to exacerbate volatility to the downside and thereby create more favorable entry levels.
Another instance of institutional manipulation, either by design or in effect, is present in the selective triggering of the so-called ‘circuit breakers’. According to CME Group, the financial services company which operates the Commodity Exchange (COMEX) under the oversight of the Commodity Futures Trading Commission, the purpose of the ‘circuit breakers’ is “to ensure that our markets continue to work in an efficient and orderly manner during volatile market conditions.” According to CME Group, “By establishing price fluctuation limits specific to each product, the exchange can help restrict a market from moving too far or too fast in a specific period of time.” However, the fact that the ‘circuit breakers’ managed by CME Group are reliably triggered as silver and gold head higher (limiting moves to the upside), whereas the same ‘circuit breakers’ were not triggered when gold and silver suffered their greatest intraday losses (on a dollar basis) in history, signals just another example of just what factors are manipulating and artificially suppressing gold and silver prices. In fact, gold prices were at some points during the period trading lower than ten percent on the day, while silver was trading a whopping thirty percent lower on the session. Consider this: it’s like a mountaineer ascending a pitch with added weight placed on his back every time he makes progress up the mountain, and then if he ever slips, the same forces hasten to take away his ice axe so he can’t self-arrest. That is the kind of control that CME Group exerts over the precious metals market; despite what the manipulators might otherwise claim, this is not a neutral risk-management system. It is, either by design or in practice, an inherent systemic bias in favor of suppressed prices in gold and silver.
Another driver has doubtless been an overreaction to President Trump's nomination of Kevin Warsh as the next Federal Reserve chairman. Reports suggest that the nomination of Warsh implies “hawkishness”, and this is commonly believed to be a bearish signal for precious metals.
Then, as a consequence of the precipitous decline, there were the many stop-losses triggered on the way down: automatic sell orders put in place by holders to protect them against further losses. This, combined with the high volumes of short selling on the way down, exacerbated the losses.
Then, of course, there is the psychological aspect: a whole lot of panic selling with (as MarketWatch has put it) “every man and his dog rushing for the exit”.
Let’s bear in mind that, with the upcoming midterms and the next presidential election not far on the horizon, President Trump will be under pressure (and applying pressure himself) to suppress interest rates and support the markets, to maintain the illusion of "the best economy in history".
However, as stated, this claim of "the best economy in history" (which President Trump so often repeats) is no doubt driven by wishful thinking and/or sheer political motivations.
When considering the lows just reported in consumer confidence and the latest series of prints in the Expectations Index, the likely course of action by the Fed becomes rather clear: far from "hawkishness", the President and the Federal Reserve chairman are more likely than not to err on the side of "dovishness", and that comes at the price of the dollar.
As I have written recently, let us remember that precious metals are held crucially as insurance against monetary and economic risks, and as precious metals prices have descended back into their longterm channels, they are still maintaining longterm bullish trends. These dynamics are not suddenly shaken out of reality just because of a daily sell-off.
While there is the possibility that the sell-off will continue, what is more certain is that volatility is here to stay and that none of the fundamentals affecting precious metals have changed in any material sense: whether one looks at the near-$40 trillion of public debt (and the record-high costs of servicing it; annually more than one-fifth of all tax receipts), the untenable growth in unfunded liabilities (greater than $100 trillion), budget deficits nearing $2 trillion a year, or the widest trade deficit in thirty-four years, the fundamentals of the U.S. economy, and thus the fundamental justification for holding precious metals, has not changed; the fact that some institutional traders decided, or had cause, to sell, and the fact that this has triggered a series of stop-losses and has caused a whirlwind of panic-selling as a consequence, has done nothing to change the fundamentals or the long-run prospects for precious metals. As weaker hands are replaced with stronger hands, the precious metals market will eventually establish a new floor, and that floor will prove a stronger and more stable basis from which we are likely to see the next leg up.
Ultimately, it is the investor who concerns himself with the longer term; it is the speculator who moves like a plastic bag in the wind, without principle and with concern only for which way the wind is blowing at the moment. The intelligent investor, on the other hand, focuses on the larger systems and the conditions which will determine the course of the climate.
Bearing this in mind, let us remember: at no time in history has a marked decline in the DJIA-to-gold ratio reversed course without the American economy first entering an official recession. As for the extent of the most recent decline in the ratio, we are at around half of the levels witnessed from the double-top of 2021 and 2022.
Should history hold in this present case and an official recession reveal itself (remember: recessions are identified officially only in hindsight), then there is precious little doubt that the President and the Federal Reserve will reveal just how ‘accommodative’ and 'dovish' they can be. Remember, part of the political game is convincing enough of the public that the economy is sound and that the markets are strong; likewise, the President and the chairman of the Federal Reserve are in the business of talking confidence into the markets and convincing enough of the public that they've got everything under control.
But, as we know, talk is cheap, particularly where the talkers pay no price for being wrong.
Author’s Note
Truthfully, nobody knows where prices will be next week, or the week after that. What’s certain is that they won’t be where they are now.
Likewise, nobody knows if or when it’s an optimal time to sell — that is, unless you are involved in coordinated institutional trading. In fact, I would argue that it’s more challenging to execute an optimal exit strategy than it is to pinpoint the bottom of the market or to know when to buy. While I have a number of indicators that I follow, that doesn’t mean that days like today are even remotely predictable. Whereas the volatility is a known quantity (and can certainly be approximated), it cannot be predicted with any measure of certainty whether any correction will come at $X or at $X+10%.
That is why I specifically talk about managing risk when it comes to planning and executing an exit strategy.
Hindsight and history have people believing that it’s possible to make perfect decisions, but for those who want to take profits along the way, the truth is that they can do this in a couple of different ways: by shedding risk at the cost of upside potential or by assuming more risk, whether by holding through the volatility in the run-up or by repositioning into riskier asset classes (including fiat currencies); among those who think that they can get cute and make a habit of trying to sell at the highs and then reenter at lower prices, the success stories pale in comparison to the failures, and the success stories are limited in their own right by their failure to repeat their successes.
While people can themselves get in the habit of chasing profits and emulating the successes of the few, it is in their interest to appreciate the less-celebrated cases that give us ample caution and remind us that we are human.
As for the people playing it cute with their trading decisions, it’s easier when you’re doing it with less capital and less conviction in what you’re buying.
As for those in precious metals, that conviction is what makes it particularly challenging when there’s a decent time to sell.
However, whereas hindsight and history reveal those opportunities to us in the rearview mirror, it’s the unseen that is seldom appreciated: the peace of mind of having insurance and knowing that, if the bridge is out ahead, you have the materials to make it through.
Comments
Post a Comment