Golden Thoughts


I’ve been rather quiet on the precious metals so far this year. I have enjoyed watching my precious metals positions rise on the back of various narratives whether true or not and now with large profits right there for the taking, I find it necessary to discuss and analyze my thoughts on the precious metals market.

Are we seeing a paradigm shift in the markets views on negative interest rates, central banks, and quantitative easing or is this something more mild? Perhaps we just witnessed minor panic that turned into a momentum trade which hedge funds and algorithms have ridden a little too far. Recall we saw a similar spike in both gold and oil in Q1 of last year. Neither of which lasted. However this time, everyone believes the recent gold rally is for real while the oil rally is false. It will be interesting to see how these two perceptions work themselves out over the next few months.

After hitting new and higher 52 week highs for the first time since 2012, a lot of people seem to think gold and silver have officially bottomed. And when looking at the Yen, Dollar and Euro, it appears that may have been in the case.


XAU/USD is the gold line. source:Bloomberg

XAUJPY bottomed in mid 2013. XAUEUR bottomed in late 2013. It may be too early to say that XAUUSD has bottomed in late 2015. I still believe the dollar is going to be headed much higher relative to other fiat currencies. Depending on what causes the dollar to make its next move higher I think gold may be surprisingly resilient to the dollar’s strength. This could be pure foolishness and I’m certainly concerned about what any renewed dollar strength will have on gold and my positions but for now I find myself in the gold has bottomed camp.

Unfortunately to my contrarian nature it appears this is a crowded camp.  Speculative positioning in the silver futures market has never been higher.

Also, anecdotally it seems that a large portion of the precious mining industry is now starting to turn bullish. Whether or not that is a good thing remains to be seen, but it has been interesting to see how quickly the psychology has turned.

But it’s not just insiders psychology that has turned, investor psychology on a whole seems to have undergone a dramatic shift. This is evident in the valuation of the mining stocks. Just a few months ago, these stocks were trading at fractions of book value, now after a large move up in silver and gold, these stocks are trading at multiples of book value. Some of these stocks are trading at 50-100% premiums to where they were the last time gold and silver were at these prices.

The obvious conclusion is that investors and the market think gold and silver have finally bottomed and are heading higher. A contrarian by nature, I find this recent faith in gold miners to be a little uncomfortable to say the least, and although I am not ready to sell a portion of my positions yet, I am watching the precious metals market quite carefully.

As always you can’t talk about any market without talking about the dollar. Perhaps the biggest surprise this year is the dollar’s downward trajectory. The DXY shown below has broken down to new 52 week lows.


Perhaps the most interesting aspect of this move is it fall against currencies that are being weakened by their central banks. In the face of falling rates and expanding central bank balance sheets the dollar has weakened considerably against both the Yen and the Euro.

Both currencies are fighting hard against their central banks to retrace 50% of their down moves against the dollar over the past few years. For EUR/USD 1.20 and USD/JPY 100 are the targets. I think if we hit those, it may be time to reconsider my sizable gold miner position.



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