On June 13th after the market closed, a newsletter subscriber asked me if it was “grasping at straws”.
This came after a potential turnaround in the precious metals sector, because of the 0.38% (2 cents) rise in Hecla (HL) on volume that was 20% above average, in the context of a day when the mining stocks generically (GDX) were down 1.1%, with gold down $11 and silver down 24 cents (US$).
In addition to HL, Fresnillo (FNLPF), Coeur Mining (CDE), Silvercrest Metals (SILV, SIL.TO) and MAG Silver (MAG, MAG.TO) were also green on the day.
Market optimism: valid or clutching at straws?
This is a valid question because, as precious metals sector investor enthusiasts are well aware, the fundamentals supportive of a big move higher in the prices of gold and silver are stronger now than at any point since the precious metals secular bull market began in late 2000 to early 2001.
Accepting fundamentals as is – or putting them aside for now, taking their immune to properly discounting true fundamentals due to official intervention in every nook and cranny of the “market” – the precious metals sector charts are starting to look interesting. The gold and silver charts as well as those for many mining stocks are showing bullish potential.
Gold in charts
The chart below shows GLD, which I use as a proxy for gold:
The price of gold is perched on its 100-day moving average (dark blue line).
The RSI momentum indicator is starting to move into an oversold reading while the MACD shows a decisively oversold condition though it appears to be treading water right now. The volume since the gold price hit $2075 intra-day on May 4th has steadily declined. This indicates to me that the selling may be losing “energy.”
Here, “selling” refers to the trading activity in the paper gold derivatives markets in London (LBMA forwards) and the COMEX (futures contracts). The only selling of physical gold and silver in material quantities is done by precious metals mining companies and coin dealers, as well as via western hemisphere central bank leasing activities, which are now being facilitated through the Bank International Settlement (BIS) gold swap activity.
For a more detailed look at the ‘paper market manipulation, Andrew Maguire covers the markets in the 100th episode of Live from the Vault.
The chart for silver is quite similar to the gold chart, though silver is sitting above its 100-day moving average. Silver is perhaps more interesting than gold currently: per the Silver Institute’s annual silver supply/demand report, industrial demand for silver rose 5% YoY in 2022 while investment demand rose 22% YoY. The latter despite the persistence of high premiums for sovereign minted bullion coins, particularly U.S. silver eagles.
Is Silver facing a supply shortage?
Based on the supply/demand calculus by the Silver Institute, a problematic supply shortage of physical silver is developing. The demand side of this equation is being driven by the electrification of automobiles globally as well as solar energy installation initiatives, particularly in India and China.
The supply side was flat YoY from 2021 to 2022 which led to a 238 million ounce supply deficit in 2022. This was the second consecutive annual supply deficit. If the silver market continues to experience a supply deficit, the upside potential for the price of silver is explosive. Without a severe global economic depression, I don’t see an alleviation in either the industrial or investment demand for physical silver.
Is history repeating itself?
That said, and while I continue to believe that the precious metals sector will be meaningfully higher in valuation before Christmas, I would not discount the potential for a repeat of the summer of 2008. Despite the crisis unfolding in the financial system in the spring of 2008 with the collapse of Bear Stearns, plus several regional banks, the precious metals sector inexorably sold off until October.
Similarly, the sudden and rapid collapse of three large regional banks a couple of months ago is signalling the onset of financial system turbulence. I am contemplating if the current set-up in the sector might be similar to the summer of 2008 in which the market grinds lower, in advance of an inevitable re-opening of the central bank monetary flood-gates.
Of course, after October the precious metals sector went on close to a three-year bull run that led to a record high for gold, a 470% move higher in silver and a record high for the mining stock indices. I believe that type of move is coming.
Dave Kranzler is a hedge fund manager, precious metals analyst and author. After years of trading expertise build-up on Wall Street, Dave now co-manages a Denver-based, precious metals and mining stock investment fund. This publication is for informational purposes only and is not intended to be a solicitation, offering or recommendation of any security, commodity, derivative, investment management service or advisory service and is not commodity trading advice. This publication does not intend to provide investment, tax or legal advice on either a general or specific basis. The opinions expressed in this article, do not purport to reflect the official policy or position of Kinesis.