Precious Metals. The second leg of the bubble unwind is upon us
I need to say something about precious metals. I’ve been a vocal bear on them since 2011. Those who’ve subjected themselves to my blog—or worse, my Twitter account—know that.
The bottom line is that a pre-crisis boom in commodities lifted gold and silver—even with Fed funds at 5%. Post-crisis monetary policy then turbo-charged it, as people feared rapid inflation, renewed systemic crisis, a dollar crash, and bond vigilantes.
The irony of the precious metals bubble is that it was the guys yelling ‘bubble’, bubbles of every stripe—bond, stock, credit—who sought refuge in the only asset class that was truly in a bubble.
Why did the bubble pop? People progressively suspected there was a recovery, inflation wasn’t materializing, and a dollar wasn’t really going anywhere.
Since then we’ve been consolidating, with successive bounces of lower amplitude, each time finding footing between 1200-1250. This is what technicians call a descending triangle.
In April 2013 I had been short gold and was vocal about it. A mutual fund executive who is a friend of mine, and with whom I regularly discuss markets and economics, said to me, “Just be careful, Mark, with your gold short. The industry is seeing meaningful inflows there.”
One has to be humble when dealing with markets, but you do have to take positions. And when you do you want to take them when you think odds are overwhelmingly in your favor—Like, right here, right now.
When I’m asked how far do I think gold can ultimately fall, my answer is I don’t know. I can only guess. The guess I’ve been working with is—as a minimum—a return to pre-crisis levels, based on the notion that the post-crisis investment theses have pretty much all turned out to have been wrong.
On this basis a pre-crisis level would come out at somewhere around 700-750. Of course, bubble unwinds do overshoot, often by a lot. But the 700 area seems to me a reasonable, even conservative expectation, if the broader thesis is right.
Source: Behavioral Macro – Precious Metals. The second leg of the bubble unwind is upon us
