Are Precious Metals a Refuge from Today’s Strange Market Behavior?

November 19, 2011

BY: Guest contribution by Forex Traders, Topics: Currency trading, precious metals

The most prevalent word in the trader’s lexicon these days has surely been volatility. Although its presence can cause an adrenalin rush in the collective trader community, the “whipsaw” action that has characterized pricing behavior over the past several months can also result in a “buzz-killer” of sorts. The sensitivity to any news in Europe, whether a political shift or a few basis point rise in Spanish debt, will now have a new “competitor” across the pond as the “Super Committee” nears its deadline to resolve the deficit conundrum in the United States.

As uncertainty, the “cousin” of volatility, persists, investors are continuing their rush to “safe havens”, hoping the storm will pass in the near term. Under such conditions, conventional wisdom would suggest that a prudent investor look to precious metals as a store of value or switch to currency trading where wavelike patterns can be anticipated with some degree of statistical probability. Analysts, however, are confused that normal correlations are not holding up. In other words, the trading environment is quickly morphing into what was seen three to four years back, and no one wishes to witness a repeat performance of those horrendously de-leveraging markets.

Commodities have been the “darlings” of the dance over the past year, but the sudden attention fostered run ups that were clearly unsustainable, resulting in a predictable, and in some cases, severe pullback move. The diagram below tells the story:

Precious metals as a group had already posted gains of 33% and 25% for 2009 and 2010, respectively, with favorable trends continuing into 2011. Silver broke from the “pack” at the start of the year and had quite a run, but it has eventually regressed back to the mean, recovering some lost ground over the last month in line with their “brethren”. The harsh correction in last May could have been the market adjusting for the end of the Fed’s quantitative easing program, while the continued appreciation reflects the uncertainty that pervades today’s market psychology.

With the next “act” about to open, what should a contrarian investor do to profit from the “herd’s” confusion? Investors that were late to the precious metals’ “party” may be licking their wounds, but the group still has future prospects worthy of consideration. Current momentum oscillators are at their midpoints, awaiting the next move, and no one is expecting a magic wand to whisk away the prevailing mood of uncertainty. Here are a few other points to ponder:

Most expect Europe to continue muddling along. No “silver bullet” solution will arise since getting unanimous support on any restructuring proposal by 17 nations is highly unlikely. Expanding the money supply will be the default, a boon for the precious metal sector;

Eric Sprott, a respected industry expert with over 40 years of investment management experience, has recently stated that Gold “owned” the past decade, but that the next decade belongs to Silver;

While precious metals have soared and pulled back, general mining stocks have lagged in their performance metrics. Most industry observers, however, are expecting superior performance in this sector, but only by the more stellar members of the group. What is good for this group is good for precious metals also;

Economic fundamentals in the U.S. have been steadily improving, perhaps overshadowed by the political drama in Europe. Recovery, coupled with inflation and rising interest rates, suggests better times to come for any store of value.

Supply and demand forces will eventually shape market valuations, but, for the next year, precious metals appear to be a safe bet.

Return to Blog