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September 23, 2020 | Here We Go Again: Precious Metals Edition

John Rubino is a former Wall Street financial analyst and author or co-author of five books, including The Money Bubble: What To Do Before It Pops and Clean Money: Picking Winners in the Green-Tech Boom. He founded the popular financial website in 2004 and sold it in 2022.

The game the government and the financial markets have been playing for the past few years – in which stocks tank until the Fed capitulates and agrees to cut interest rates and/or ramp up QE, after which markets soar  – is usually measured in stock price terms.

In other words, the S&P 500 drops by 18% in two weeks and that is deemed scary enough to force the Fed to fire up the printing press.

But precious metals also tend to be swept along on these massive tides of hot money. In March of this year,  for instance, stocks tanked, but so, counterintuitively, did supposedly “non-correlated” assets like gold and silver.

The explanation for this is probably that when your stocks are plunging you have to raise money, and the easiest way to do that is to sell whatever is 1) up recently and 2) liquid enough to be easily moved. So you don’t sell your house, but you do sell some gold, silver, mining stocks or if you have them, precious metals futures contracts.

Then the Fed rides to the rescue and precious metals retrace their decline – and then some – on the prospect of huge new infusions of easy money.

Well, here we go again. The Fed promises low interest rates for years to come, but stocks read this as “no further cuts” and proceed to roll over. Gold and especially silver get slammed in the general rush into cash.

The following chart shows what happened in March and the replay that is apparently beginning now.

stocks and gold 2020 low-ball bid precious metals

What happens next? If the rules of this game still apply, stocks, gold, and silver will keep falling until the Fed and/or Congress provide another big cash infusion. That’s already coming on the fiscal side, as Congress debates the size of the next pandemic stimulus bill. If it includes another round of $1,200 checks for Millennial Robinhood traders, that alone might revive the market’s animal spirits. If not, the focus will shift to the Fed, which will be forced into some kind of “whatever it takes” stance that includes negative interest rates and possibly direct purchase of equities.

Either way, precious metals and related mining stocks – again, if the game continues – will suffer for a while and then resume their bull markets. In the mining stock universe there are literally hundreds of examples of a March collapse followed by parabolic recovery in subsequent months. Here’s one to whet your appetite: primary silver miner First Majestic fell from 12 to 5 in March before tripling in the ensuing five months.

First Majestic Silver low-ball bid precious metals

Now the rollercoaster is heading back down. This chart, along with most others in the precious metals space, screams “low-ball bid”.

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September 23rd, 2020

Posted In: John Rubino Substack

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