Thursday's Precious Metals Watch
These are memorable moments unfolding within the precious metals market in recent weeks, with the past couple of days in particular bringing the action to a whole new level of fascination for longtime observers like myself.
For those who may have been lulled into complacency by the entended duration of the prior rally and taken on leverage as a result, no doubt by this stage the reasoning behind my unyielding admonition against leveraging one's exposure to pms resonates more clearly now. Please learn from this experience and move forward without leverage.
On the other hand, for Fools who have accrued a diverse basket of quality equity vehicles for gold and silver, the damage has been impressively slight. No doubt this can be attributed in part to the significant refusal of mining equities to follow silver higher from about the $40-level onward. But it also speaks to the increased strength behind the long side of this market as compared with the dynamics observed during prior corrections. Toward the end of the day yesterday many equities showed resolve by striking higher amid a deep down day for silver. Today the battle line is inching back a bit, but the resolve remains visible in the refusal of long-term bulls to abandon these equities in the face of new-found weakness. Remember, structurally speaking, a correction within a secular bull market is about shaking out the weaker, shorter-term, and more speculative segments of a market and returning control near-term control to the hands of long-term stakeholders.
CME Group has shown it is out for blood by raising margin requirements for the fourth time in two weeks, for an 84% increase from $11,745 to $21,600 per contract. Yesterday's follow-on announcement is music to the ears of silver shorts, who will no doubt seek to pounce upon the demoralized sentiment of the speculative longs. Silver is making a momentary stand at $36 as I write, which was the next level beneath $40 that I had pegged as likely support, but I am certainly not ruling out further damage ... particularly if the USDX advances further and gold remains beneath $1,500.
In a matter of days, the gold:silver ratio has been restored to its modern historical range above 40 from recent lows in the low-30s that fankly came as a surprise to me (too far, too soon). This is an invitation for gold to retake the reins from silver, so it will be fascinating to see which metal ultimate leads the way out of this correction. My money is on gold, and I think gold is now entirely likely to take out much higher levels before silver can dream of hitting $50 again. If I had to guess, and that's all this is, I would now expect $50 silver at anywhere between $1,700 and $2,000 gold.
Now for something really bizarre: CEF is trading at a substantial discount to its Net Asset Value. This is one of the most illogical market dislocations I have ever seen, and I expect to correct itself very abruptly (especially as prompted by today's headline reminding the market that the fund just closed a $360 million non-dilutive offering priced at $22.30 (an even which already serves under normal market conditions to bring premiums above NAV back down to Earth). Since I began holding in CEF in 2005, I have never seen a negative NAV, and I intend to confirm whether it may be utterly unprecedented as I suspect it is. Fascinating! I can only guess at a possible explanation, which would be that some of the long-side speculators caught by the raised margin and forced to flee may have also hald large stakes in CEF and been forced to liquidate to cover margin. Again, that is purely a guess.
More in a bit, but I at least wanted to get the discussion going. What do you make of these fascinating market dynamics?