It’s been an exciting past few days for investors in the metals complex, with both gold (GLD) and silver (SLV) soaring higher following increases tensions in the Middle East. Gold jumped more than 3% the past few days following the news, and silver jumped more than 4%. While this has been an excellent opportunity for traders to trim some exposure in silver and silver miners (SIL), I would not expect these gains to continue at this pace barring significant further escalations. Instead, I’ve found that metals often spike on fear, but they trend on fundamentals. Based on this, I believe this was an opportunity to trim some exposure, not chase the metals higher.
It’s no secret that the gold and silver trade have significant tailwinds at their back heading into 2020, with rates remaining low and inflation climbing above 2%. There seems to be a misconception, however, that the fear trade is what moves gold and silver. While this may seem true given that gold and silver tend to see the most upside volatility on geopolitical events, this upside is often ephemeral; it is not what is genuinely powering the metal higher. Instead, the catalyst for higher metals prices is higher inflation, and the fear trade tends to fizzle out quickly, as we saw in the early ’90s with the Iraqi Air War. While gold spiked initially on this news, its rally promptly tapered off, and it gave up these gains within a week. Therefore, I do not believe this recent uncertainty and fear trade is a catalyst for owning gold or silver. Instead, I believe it was an opportunity to reduce some exposure. Let’s take a look at the charts below:
(Source: Author’s Chart)
As I pointed out in a previous article, the fact that the 3-month treasury rate (1.50%) continues to be well below the inflation rate (2.10%) is a positive fundamental backdrop for both gold and silver. When we have this in place, one should expect any sharp dips of 5-10% to get bought in the metals, and corrections are buying opportunities. However, just because we have a positive fundamental backdrop in place does not mean one should rush out and chase the metals at their highs while they’re running smack into resistance. This is precisely the case with what we’re seeing on silver currently, with crucial resistance for the metal right near $18.45/oz.
As we can see in the above chart, silver may be above its rising 50-day and 200-day moving averages (blue and yellow lines), but it’s also more than 10% above crucial support at $16.25/oz and within a stone’s throw of key resistance. This is not the ideal time to be adding exposure at all and is a better spot to be curtailing exposure a little if one must do something at current levels. While silver may push through this key resistance, I would be less inclined to believe a geopolitical event is going to be the catalyst for this. Instead, I would be looking for higher inflation or a further drop in the 3-month treasury rate to be the catalyst for a push above this key resistance on a weekly close. As long as the bears can defend this $18.45/oz level on a weekly close, we remain in a range-bound market for silver. This means buying dips and reducing exposure into rallies.
Based on the fact that both gold and silver ran into key resistance this week, I trimmed my position in gold bought at $1,455/oz, and am in no rush to do any buying in either silver or silver miners. While I remain bullish on both gold and silver as their monthly charts continue to improve, there is a time and place to be adding exposure; and this is not the place. I continue to see gold and silver as holds here, but see no reason to chase the metals higher at current levels ($1,570/oz, and $18.30/oz).
(Disclosure: I remain long gold from $1,455/oz, and GLD from $136.80, but reduced my position earlier this week)
The iShares Silver Trust (SLV) was trading at $17.07 per share on Tuesday morning, up $0.13 (+0.77%). Year-to-date, SLV has gained 6.75%, versus a 21.50% rise in the benchmark S&P 500 index during the same period.
About the Author: Taylor Dart
Taylor Dart has over 10 years of experience in active & passive investing specializing in mid-cap growth stocks, as well as the precious metals sector. He has been writing on Seeking Alpha for four years, and managing his own portfolios since 2008. His main focus is on growth stocks outperforming the market and their peers. In addition to looking at the fundamentals, he uses different timing models for industry groups, and scans upwards of 2000 stocks daily to identify the best fundamental opportunities with the timeliest technical setups. Taylor is a huge proponent of Trend Following and the “Turtles” who enjoyed compound annual growth rates of over 50 percent per year.