Don’t Get Ruined by These 10 Popular Investment Myths (Part IX)
Interest rates, oil prices, earnings, GDP, wars, peace, terrorism, inflation, monetary policy, etc. — NONE have a reliable effect on the stock market
You may remember that after the 2008-2009 crash, many called into question traditional economic models. Why did they fail?
And more importantly, will they warn us of a new approaching doomsday, should there be one?
This series gives you a well-researched answer. Here is Part IX; come back soon for Part X.
Myth #9: Inflation makes gold and silver go up.
By Robert Prechter (excerpted from the monthly Elliott Wave Theorist; published since 1979)
This one seems like a no-brainer. The government or the central bank prints more bonds, notes and bills, and prices for things go up in response. Gold is real money, so it must fluctuate along with the inflation rate.
Well, here came the short covering rally in the precious metals. By calling it that I don’t mean that it cannot turn into something more, but today was most assuredly driven by short covering as the US dollar unwound some of its speculative sponsorship. One can assume that large speculators took it on the chin on both ends, in the USD and in gold/silver as the Commercial traders had been aligned increasingly bearish and bullish, respectively.
Gold vs. Silver During Precious Metals Bull Markets
It is widely believed that silver outperforms gold during bull markets for these metals, but that’s only partially true. It’s true that silver tends to achieve a greater percentage gain than gold from bull-market start to bull-market end. It’s also the case that silver tends to do better during the final year of a cyclical bull market and during the late stages of the intermediate-term rallies that happen within cyclical bull markets. However, the early stages of gold-silver bull markets tend to be characterised by relative strength in gold. This is a point we’ve made in the past, including in TSI commentaries earlier this year, but warrants revisiting due to the recent price action.
The gold and silver Commitments of Traders data are out and what do you know, they improved again. Lot of good it has done precious metals investors thus far, but maybe next time people will take seriously those times when the goons are gathering short while at the same time the promoters are popping off about Ukraine, Chinese demand and Indian Wedding Season.
People should try to get their heads out of their ass(et) classes and look at the signals that these assets may be sending. Look, gold bugs are screwed and being run up the analytical flagpole as outdated anachronisms and stuffy old fogies with outmoded views. The stock market has proven bullish again and again and policy making has worked swimmingly for a couple years now.
So take out the gold bug, the silver bug, the commodity and inflation bug and the stock market bull and/or bear and just look at the signals. The Gold-Silver ratio (GSR) is rising strongly and it is happening in unison with the now well bull horned US dollar, which everyone left for dead just a few months ago *. The question that should be asked now is not ‘how do I defend my stance?’ or ‘what asset should I buy or sell?’ but rather, ‘what does this mean from a macro market view?’
The correlation by daily view of the GLD/SLV and UUP ETFs is not very good, but over a longer-term is GSR and USD are generally in line. We have always felt that the USD (a global asset anti-market or counter party) is a bedfellow of the gold-silver ratio (a risk off/illiquidity indicator).
More to come on this in the form an NFTRH excerpt later on. But we should be beyond hoping that this or that asset class will go up and into a time of evaluating what, if any meanings can be taken from the USD-GSR relationship. A lot of people are interpreting the rise of the USD as a bullish event, with only gold and commodities to suffer. They had better do the work to confirm that view rather than just making assumptions.
* Not by me and not by my market management service. We charted its hold of important support and casually followed its progress every single week. Now Uncle Buck is all lit up in neon and as usual, a majority is now aboard the story and promoting distortions.
As expected, there was improvement this week in the gold and silver CoT data. Silver did not do much but it had been improving much more steadily than gold, which mysteriously (ha ha ha) took a sizable hit a week ago Thursday. This data includes that hit. The goons did some covering on that day. Click graphics for full view…
We are operating to parameters on a would-be gold sector bottoming process, which has been a year+ long grind (‘grind is good’ as it absolutely ruins peoples’ nerves over time) and which by the way, everyone sees now as either a final bottom or a consolidation before the final and spirit destroying wipe out, depending on their Team’s hopes and aspirations (bull or bear).
About a year ago NFTRH projected two possibilities (within the context that it was only in the realm of potential) and they were a ‘W’ bottom or failing that (it promptly failed) an Inverted Head & Shoulders on the HUI. Today a new pattern has joined the IH&S and it is a Symmetrical Triangle, which would be a consolidation before the final crash.
I used this morning’s bump to cover the DSLV short (i.e. silver 3x long) position at a shade below break even (-.5%). The reason being that it is in a series of lower lows and lower highs. I think that silver is going to be a buy soon, but unless it paints a green circle above 19.70 the potential is there for lower prices first. I don’t want to be leveraged in that case. I’ll just stick with a few normal and relative quality mining positions for now. Here’s the current silver price from BullionVault (you can pull this and the gold chart live any time using the link above).
From a post on August 6: “I could miss the opportunity of a life time (always a bad way of thinking as a trader) but I am not going to take the chance that this is a little bear flag forming on SLV. I took my modest 3% from shorting DSLV and booked it.”
It was a bear flag.
Well, they say you’ve got to take risk to make gains so today I shorted DSLV again after silver plunked the parameter NFTRH has had on watch for weeks now, support at 19.50 to 19.75. What is good about the trade is not its surety of profit, but its well defined stop loss. But if silver holds the support zone and heaven forbid turns up, the profit should be a lot bigger than the humble 3% last week.
With today’s hard down, the parameter is whisker thin, which means the stop is intolerant. But silver no longer has the issue we (NFTRH) were concerned about as it got too pumpy both nominally and in relation to gold. So I’ll consider myself a bull coming in to replace the momo’s who have been scattered to the hills again.