Steve Penny, a.k.a Silver Chartist on Twitter and I had a sit-down on January 31, 2022, and we talked about gold and silver, and what could happen to them going into an interesting 2022, how to recognise a bottom in precious metals, and we even had a look at Steve’s gold and silver charts.
None of what you are about to read is intended as financial advice nor trading recommendations. Read the full disclaimer (https://resourcetalks.com/disclosure/) before continuing.
Is it time to get out of dodge or back up the truck on gold and silver? According to Silver Chartist, we may be entering an important period in which gold and silver will start going up. Steve remains bullish on the precious metals (gold, silver, and platinum) and he thinks that if one can afford to hold their position for the next five years, they will likely be okay.
What if there is a stock market crash, will gold and silver fall, too?
Typically, when there is a stock market crash, gold and silver gold down in unison with the stock market, but they often recover more quickly.
However, during the last bull run, before the crash of 2008, the precious metals also went up with the stock market, and then crashed with it. That’s not what we’re witnessing right now.
Although the GSCI has outperformed all three of the main US indices, gold and silver stocks have massively lagged both the US stock market, and even the physical metals. This makes Steve think that, while a stock market crash would most certainly bring down the metals as well, many people might be surprised by the performance of gold and silver stocks.
Why are gold and silver not responding to inflation, lower return on energy, looser monetary policy, etc?
Steve’s answer to this was interesting because it tied in to another conversation I had with Patrick Karim (@badcharts1), where he told me that gold and silver are actually predicting indicators, as oppose to lagging ones.
Silver Chartist told me that he thinks gold and silver have remained under pressure because, when we saw high inflation in 2022, many investors and speculators thought that the FED will swoop right in and immediately start, aggressively, raising interest rates, which is generally see as negative for precious metals prices and other non-interest-paying assets.
So, in a sense, believe it or not, high inflation was seen as being bad for the metals. Steve expects this to start changing soon. He’s basing his opinion on the reaction that precious metals prices gave to the inflation data that showed +7% inflation. Usually, if Steve’s opinion is correct and the market saw inflation as bad for the metals, those data would’ve crushed the precious metals, but gold and silver actually rose on the data. This is telling Steve that we might be seeing a shift in the way investors view the relationship between inflation, gold & silver.
All that is to say that, ones the general market psychology changes, and we get a clear recognition that the FED is behind the curve, with their back to the wall, and there is no way out (infant of the choice of deflation vs inflation), that’s when Steve expects gold and silver to start moving higher. He thinks that’s inevitable, and we just have to wait for it.
The other thesis, on why precious metals have been lagging both stocks, and commodities, came from, as I said, Patrick Karim (@badcharts1). He told me that gold and silver had predicted inflation, and had, therefore, already gone up before inflation data came along. So, the fact that we have inflation now, but gold and silver are not moving up was not surprising to him.
Steve agrees that even when the FED was only talking about hoping, about starting to talk about tapering soon, gold had “sniffed” that out, and had, therefore, already moved, in the summer of 2020.
Therefore, Silver Chartist thinks that gold & silver, as forward-looking indicators, will soon sniffed out the intention of the FED’s easing policies, and that will cause the next move higher, soon.
“It’s not possible for the FED to create sustained positive real interest rates without collapsing everything”.Steve Penny (@silverchartist)
The main thesis for rising gold prices over the next five years that Steve has, is that it is not possible for the FED to raise interest rates beyond the levels of inflation. Even if they manage to get back in the 2.5%-range, when the official (presumably, allegedly fake) inflation numbers as measured by the CPI are in the 7%-range, we would still have negative real interest rates.
Steve reminded me that the US is currently over $30T in “national debt”, and that every 1% rise in interest rates is $300B added to the interest payments that are due annually. Say that the FED magically gets interest rates to 5%, without crashing everything (which is practically impossible), that would be an added $1.5T of interest payments that are due at the end of the year. This doesn’t measure up that nicely against the (roughly) $4T in tax receipts.
How can I know when the bottom for gold and silver is in?
Steve, as his professional nickname suggests, thinks that technical analysis is the best tool for recognising turning moments in the prices of assets.
In the Silver Chartist newsletter, one of the contributors (David Brady) recently wrote a piece on the eight signals that one should be looking at, for a bottom.
One of those indicators is the weekly RSI. Not the daily, preferably the monthly, or at least the weekly RSI falling sharply below 30, could be a good buying signal. That’s still not the case for gold, nor silver.
Another technical sign of a bottom could be a positively-divergent lower low. If you see a lower low in the price of the metal, but the RSI doesn’t make a lower low, that could be a strong buying signal, Steve told me. Again, you want to zoom on at least to the weekly chart, in his opinion.
Obviously, there’s always ratios. Steve is a big fan of ratios.
For example, during the March crash of 2020, we saw a gold-to-silver ratio of almost 130:1, this was what Steve calls an “extreme”, historically, and as we all know nothing extreme in life ever lasts. Extremes in ratios, are a very good signal for a bottom, in Steve’s opinion.
Funnily enough, a gold-to-silver ratio of over 100:1, is not only a sign for a bottom in silver, but it could be a sign for a bottom in precious metals as a whole. That’s because silver is more volatile. Silver goes to lower lows during crashes, and higher highs during runs. So, whenever the GTSR reaches such an extreme, that probably means silver has bottom, but when silver bottoms, so does gold and, often, other precious metals as well.
Another example of a ratio he gave me was the gold-to-Dow ratio, which is currently showing a very bullish reading for gold, and a very bearish reading for the Dow 30.
According to Steve, although less conservative, he would expect that ratio to go back to the historical high of 1:1. Meaning, Steve expects the Dow to fall to the 15,000-range, which would mean Steve expects gold to reach a price of $15,000/oz.
Even if this sounds obnoxious, what it shows us is that hard assets are extremely overvalued relative to most other assets, and if one believes in a reversion to the mean, commodities might offer a great way for one to put their money where their mouth is.
Another point that I made during my conversation with Steve, that Bob Moriarty told me about, is using the premiums as a sentiment indicator, which could tell you when people are being greedy and when they’re being fearful.
One specific example that really stuck with me is the exercise of visiting different bullion dealers websites, and looking at the breadth of their offering, on a consistent basis.
If the dealer has 1000 different physical silver products for sale, at very low premiums, that’s probably telling you that people are scared of silver and don’t want to touch it. For investors aspiring to be contrarians, this could be a buying signal.
However, if you’re in a situation where just a few months or so ago there were those 1000 offerings, but now there’s only 5 silver products with a very high premium on them, yet the price hasn’t moved yet, that tells you that the sentiment for silver has picked up massively but the price is lagging it.
According to Bob Moriarty who is among the most experienced traders and investors that I know, and know of, in this sector, that’s a very important sign of a bottom.
When should I sell my gold and silver stocks?
Silver Chartist told me that he is actually looking forward to the day where is he completely out of the metals, and holds a nicely diversified basket of blue-chip dividend-paying US value stocks, that he doesn’t have to track on the daily.
Steve told me that he would start paying very close attention to his precious metals holdings when the Dow:Gold ratio starts coming close to 4:1. His plan is to gradually scale out and reposition his capital into undervalued general equities.
The reason why Steve hasn’t done it already is simply because of how overvalued general equities look to him, in relation to gold and silver.
More on this topic
This was just a quick summary for myself, to summarise what Steve tried telling me on Monday. If you want to hear him give a more in-depth explanation on the things I wrote, you might want to consider watching the full interview I did with him over here:
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