Precious Metals: Risk Management To Opportunity

A solid 2.5 years of risk management (to varying degrees) has been required of precious metals investors.  It was most intensely required after the announcement of QE3, when the net commercial short position in silver began a relentless march toward a very bearish alignment in late 2012 and then the HUI Gold Bugs index lost an important support level at around 460.  Here is the chart of silver with a heavy commercial net short position from NFTRH 215, dated 12.2.12:

Chart courtesy of SlopeCharts

If upside can continue with the green (profits) and blue (S&P 500) lines in the absence of the black line (which could theoretically decline if the Fed tapers its money printing in service to bond buying) then more power to the Fed and those who unquestioningly jumped into the risk pool at the behest of its policy.  But if money supply starts to ‘taper’ off and profits, the stock market and the economy start to falter then we have… the counter cycle.

The inflation has already been promoted and it has not included the precious metals.  What we have in front of us now as I see it is one of two things:

• Thing 1:  The banks become incentivized by the spreads between the ZIRP-pinned Fed Funds and the theoretical rise in long-term yields (again, note the EMA 100 on the TYX chart above) that a ‘taper’ regime would imply.  This could ‘get the money out there’ to Main Street, delivering inflation to Mom and Pop.  Inflationists talk about such a phenomenon driving up all sorts of cost of living items including oil.  Unfortunately, inflationists are also talking about strongly rising oil prices as being the fuse to set off gold’s next great moon launch.

One might want to be careful about this line of thinking, especially if one is a gold stock bull because impulsively rising energy costs would not do the miners any good.

• Thing 2:  The yield on the 30 year bond above does indeed turn down into a counter cycle, complete with a potential whiff of deflation.  But if short term yields decline in relation to long term yields – which would be expected in a counter cyclical ‘risk off’ environment, then the stage is set for a real bull phase in the precious metals and most notably, quality mining companies.

There is so much more to write about this subject that is telling its story each week for patient people to interpret.  Having already gotten long-winded, I’ll simply note that much of the same ideology that got precious metals boosters into trouble in the first place is still out there making the rounds.  I believe the odds are good that 2014 is going to introduce a macro pivot point that puts most people off sides, whether they be stock market bulls, gold bugs or inflation touts.