The Precious Metals Crash

If you’ve been reading this letter faithfully for a while, you know I have been a big proponent of diversifying into precious metals (a lot) over the years. Well, I had the worst day I’ve ever had trading last week. This was on Friday when all the metals crashed.

When gold is down 10% in a single day, what are we to make of this?

I think about crashes in history. In 1987, the stock market was down 23% in a day. And then, over the following weeks, it stabilized and resumed its bull market. A comparable crash was in 1929—the market was down 13% one day and 12% the next. It went on to go down 89% over the course of four years. So, which scenario are we dealing with?

You might have guessed that I think this is more like 1987 than 1929. This “debasement trade” that people have been talking about is still very young. The dollar just broke through trendline support two weeks ago. Emerging markets (EM) and commodities have been rallying for a while, but EM just last week broke out of an 18-year base, and commodities broke out two weeks ago as well. 

In my view, the debasement trade (I hate that term) is just getting going, not getting down to tag ends. Sentiment and speculation got very hot in silver, but we are far from the mania in commodities that we were experiencing in the early 1980s. It may take a while before gold and silver make new highs (especially in the case of silver), but it will happen—perhaps sooner than we think. Metals investors are a hardy bunch—out of all the people I have spoken with since the crash, only one person’s faith was shaken.

Of course, the smart thing to do would have been to sell a little as the metals were making new highs. I advocated for this in The Daily Dirtnap, and I sold a little silver and silver miners myself, which cushioned the blow. But the only reason to sell all of it would have been if you thought that we were going to suddenly balance the federal budget this year, and that Trump would stop his obsession with lowering interest rates to zero. I am fond of saying that the bull case is always most compelling at the highs, but the bull case will be even more bullish. 

Fast forward to 2028. Do you think a Democratic president will allow the Fed to be independent? Do you think a Democratic president will balance the budget? Or do you think it will get worse? As my friend Lyn Alden likes to say, nothing stops this train.

We’re Past the Fifth Inning

So, we all took a big hickey last Friday. Do you add more? That’s up to you, and I can’t advise you on your own personal financial situation. If you have gobs of cash laying around, sure. If you are already fully invested, I would not go on margin to buy more gold. I fall into the latter category. 

In any case, if you use the baseball game analogy, and you think about what inning we’re in with precious metals, I’d say this is an official game at this point. We’re past the fifth inning. Once you get past the fifth inning, you start thinking about exiting, rather than adding. Of course, you want to nail the dismount. It is very, very hard. I am fond of saying that sometimes you just make enough money, and you exit your positions without regret. 

If gold goes to $30,000/ounce, you probably want to jump off a building, but like I said, no regret. I am a scale-up seller. My range extension target on gold is $7,200/ounce—I will probably sell a little there. When it comes to the miners, the miners are going to be printing money whether gold is at $5,500 or $4,800. They are still cheap. But yes, I will scale out of some miners, too, if gold gets to my target. 

Again, you just make enough money. No regrets. But I do think that gold ultimately gets above $7,200.

Like Chumbawamba, I will get back up again. Imagine if you had the faith and conviction that the bitcoin people did in 2017, or the equity index fund investors have had for the last 15 years. It would be odd if the gold bull market ended on Warsh being nominated for Fed chairman, especially since everyone knows that Trump is going to spend the next three years tugging on his ear and haranguing him on Truth to lower rates. I don’t think Trump would have appointed him unless there was an explicit agreement to lower rates a lot. 

But, of course, it wasn’t just about Warsh. It was about sentiment and excessive speculation and leverage in the system. Warsh was just the catalyst.

Jared Dillian, MFA

In happier news, I had the DJ gig of a lifetime last week—playing at Omnia in Las Vegas, the biggest, baddest, wildest nightclub in the country, in front of 2,000 people. It was insanity. Here is a picture:

If you want to hear the music from my two-hour set, go to my SoundCloud here. You’ll have your hands in the air in your home office.