PMs – help with the “other side” please
As part of “due diligence” I’d like to read those who are writing about/arguing for “the coming secular bear market in precious metals”. Anyone out there doing a superb/good/so-so job of making this case, either as a Volcker-1980 type event or for some other reasons?
The Automatic Earth argues for deflation of all assets and a strong dollar as credit is destroyed (leading to a shortage of dollars). In my opinion, they make a very compelling argument.
Here are some excerpts from John Hussman’s Weekly Market Commentary to investors that pertain to gold and silver. Make of it what you will….Jeff
On the subject of commodities, it’s a natural question whether gold falls into the same category as agricultural commodities. After all, gold and other hard assets have an important role as an alternative to money to store value, and it appears clear that the world is monetizing in a way that is unlikely to be fully reversed even if policy makers wish to do so down the road.
In my view, it’s not clear that gold is in a bubble here, but it will be important to watch for the earmarks of a classic bubble. Below, I’ve plotted the price of gold against a “canonical” log-periodic bubble. Already, we’re seeing some behavior that is characteristic of a bubble-type advance. A Sornette-type analysis generates a finite-time singularity as early as April, but there are other fits that are consistent with a more sustained advance. If we observe a virtually uncorrected advance toward about 1500 in the next several weeks, the steep and uncorrected advance would imply an increasing hazard probability.
Again, for my part, I think it’s a bit ambitious to use log-periodic functions and other purely mathematical tools to identify bubbles and gauge crash hazards. We prefer more fundamental approaches. While I don’t view gold stocks as overvalued relative to the metal (which gives us some margin of safety in the gold shares we own in Strategic Total Return), we have to view the rate and character of the advance in gold with some suspicion. If gold continues a parabolic advance toward 1500, the risk of a very sharp decline in precious metals would increase substantially, in my view. Classic bubbles tend to have a “signature” – parabolic advances with shallow and increasingly frequent corrections. Eventually, you begin to see price spikes at one-day, one-hour and even ten-minute intervals. That’s a danger sign to monitor. Remember, if emerging markets stocks have taught investors one thing, it’s that it’s very possible for a long-term thesis to remain intact and yet have prices suffer significant declines over the intermediate-term.
In gold, the further advance in prices on shallow corrections brings us back to the concern I expressed a few weeks ago about bubble-type action. Silver prices are displaying even more exaggerated “log-periodic” behavior, as are some agricultural commodities. We don’t know exactly when this will end, but we would prefer to scale back early rather than late. A Sornette-type analysis (see Anatomy of a Bubble ) suggests a “finite-time singularity” within days or weeks. Any additional upward leaps in price, with very shallow corrections and increasing volatility at 10-minute intervals would strengthen that impression further. I’ve been generally bullish on gold since September of 2000, when it was below $300 an ounce and we observed a clearly favorable shift in the set of conditions I noted in Going for the Gold . Our actual gold models are more elaborate in practice, but as I noted back then, precious metals shares tend to perform far better in the face of falling Treasury yields, particularly when the ISM indices are weak. Those conditions are absent at present, and the recent extreme price behavior is of some concern. The rally in gold stock prices late in the week gave us an opportunity to clip our exposure back to about 6% of assets in Strategic Total Return. The risks in precious metals are clearly increasing.
The Strategic Total Return Fund presently carries a duration of about 2.5 years, with less than 4% of assets in precious metals shares, where market action appears to be closely tracking a well-defined Sornette-type bubble with a rapidly approaching “finite-time singularity” (see Anatomy of a Bubble ). From a more standard technical perspective, the recent range-expansion within a parabolic trend is suggestive of an “exhaustion rally” in gold and silver. I continue to believe that inflation risk is likely to be concentrated in the second half of this decade, and very much doubt the ability of investors to consistently maintain an inflation thesis in the interim. Historically, the markets have a convincing record of punishing crowded trades.
In precious metals, the selloff in gold and silver was modestly constructive in that it moves us closer to the point where we would be willing to re-establish some of the exposure we cut previously. The breathtaking plunge in silver prices was a wonderfully instructive example, I thought, of what happens when a Sornette-type bubble hits its “finite time singularity” (see Anatomy of a Bubble ).
Perfect. Thanks much Rickets & JAG. I’ll check these out.
Some people also expect a temporary decline in both gold and silver with the end of QE 2 (they don’t expect a permanent decline as they expect there will shortly be a QE 3).