The Bad Character
Time is tight this week, so HAI will be brief. While the medium- to long-term outlook for precious metals remains exceptionally bullish, another short-term leg lower in precious metals loomed as a very distinct possibility several weeks ago. By the close of this week, however, that risk has—in HAI‘s view—notably diminished. Of course we could still see a second leg lower, but that possibility seems to have diminished from perhaps 45% down to 15%. That’s a very meaningful bullish shift in near-term expectations for the precious metals complex.
The primary reasons for the bullish upgrade in the near-term outlook are the facts that gold and silver managed to close the week at new post-correction highs and the gold mining ETFs closed the week at new all-time highs. Additionally, after breaking out against the S&P 500 in January, the gold miners also broke out against physical gold on the monthly close.
HAI does not believe the gold miners would be making a massively bullish breakout against gold if gold and silver prices were about to resume another leg lower. Typically, the mining stocks underperform when the price of physical metals is dropping, and outperform when the price of physical is rising. Furthermore, when the precious metals miners temporarily outperform the physical metals during sector declines—as has been the case since January 30th—that’s usually a very strong signal that the entire sector is primed to reengage to the upside.
In HAI‘s view, the question of resumed precious metals upside price action was always a question of when, not if. This week, the technicals offered compelling evidence that the when is now. Meanwhile, Jeff Currie, Former Goldman Sachs Head of Commodity Research, offered a simple and compelling fundamental explanation for why a resumption of the precious metals bull is a question of timing rather than likelihood.
On MacroVoices this week, Currie said, “Why is gold to the moon? You’re hoarding gold. Why are you hoarding gold? Because owning dollars is dangerous.” Then, however—and importantly—Currie added, “this is not the dollar being singled out as being the bad character. This is fiat currency being singled out as the bad character.”
Currie’s comments are subtle but incisive. He’s saying that the dollar (formerly the standout strong fiat relative to the weak/dangerous fiat rule) has become “dangerous” along with all other fiat currencies. More importantly, in HAI‘s view, he’s saying that now that the once-almighty dollar has fallen, all unbacked state-controlled fiat is “the bad character.” And when fiat writ large becomes the bad character, gold quickly fills the void as the good character—the only real money.
The fundamental case for a bullish precious metals sector remains tight, but now the near-term technicals are also swinging more bullish. Short-term market moves are the hardest to pin-down, but, in HAI‘s view, the entire precious metals sector looks like it might be close to initiating another powerful bull-leg into the summer.
HAI will continue to monitor developments closely and provide updates in the weeks ahead. But if a powerful PM bull leg does indeed start ripping again imminently, it shouldn’t be a surprise. After all, “the dollar is [now] dangerous,” and all “fiat currency [is] being singled out as the bad character.” Meanwhile, the precious metals stand alone at the epicenter of fiat disillusionment and monetary trust.
Weekly performance: The S&P 500 was off 0.44%. Gold was up 3.31%, silver was up 10.93%, platinum was up 9.20%, and palladium was up 2.70%. The HUI gold miners index gained 9.60%. The IFRA iShares US Infrastructure ETF was nearly flat, up 0.08%. Energy commodities were volatile and mixed on the week. WTI crude oil was up 1.22%, while natural gas was off by 6.24%. The CRB Commodity Index was up by 0.53%. Copper gained by 3.00%. The Dow Jones US Specialty Real Estate Investment Trust Index was up 1.20%. The Vanguard Utilities ETF was up 2.78%. The dollar index was off 0.16% to close the week at 97.64. The yield on the 10-yr U.S. Treasury was down 14 bps on the week closing at 3.95%.
Have a wonderful weekend!
Morgan Lewis
Investment Strategist & Co-Portfolio Manager
MWM LLC
