I Love Gold But I Am Buying Silver (NYSEARCA:SLV)

I Love Gold (Gold Member reference)

I may not be as obsessed as the Austin Powers supervillain but it is pretty clear that gold is having its moment. Central banks are buyers to quote Bloomberg “central banks, in particular, as well as big institutions and traders preparing for a shift to looser rates. Chinese consumers are worried about wilting returns in other assets and a depreciating currency.” According to the same Bloomberg article Central Banks have been buying tons of gold since last summer. Also, individuals are buying physical gold and less of the ETFs. This tells me that there are buyers in developing countries like India who are traditional buyers of the yellow metal along with worried Chinese consumers, who are creating a sustained base for gold to continue breaking out. Now US consumers are buying the physical metal too.

Gold ETFs show outflows but I believe that will change as money managers get active

What is interesting as pointed out by the article is that the Gold ETF (GLD) is experiencing outflows. So the real surprise is that investors from developed countries are buying the physical metal supporting the price. I think the gold rally is sustainable and the ETF will catch on. The main thrust of the article is the question of why Gold is soaring now, which is a puzzle after Central Banks have been buying tons for months… The article lists the “usual suspect” as pension funds. Investment banks, sovereign wealth funds along with Central Banks. They note that futures contracts are rising and point to money managers who are betting on an extended rally. This is where I want to build my case for gold and by extension Silver which I have been trading in the form of the Silver ETF (NYSEARCA:SLV). Money managers will start with futures but will spread their trading to equities and ETFs as the gold rally extends – what’s more, they will move into SLV as silver sustains its outperformance compared to gold. The US is growing, manufacturing is finally perking up Manufacturing PMI at 50.3%; for March 2024 was reported this week, up 2.5 percentage points from the 47.8 percent recorded in February.

At the same time, the consumer is still consuming, so jewelry is also in demand, and anecdotally Costco is selling a lot of gold bars, $100M worth last quarter as reported by many news outlets. I do not doubt that a similar amount is moving this month. So we have more futures being bought by money managers, and physical gold bought not only by central banks but institutions and individuals. Technically, Gold has broken out after many months of sideways consolidation, as chartists know, such a consolidation will power Gold much further. This is of course my opinion, but I will illustrate with charts to leave no doubt for the reader.

So why trade silver and not gold?

Gold is valued higher than ever, but silver is still lagging. I believe silver will play catch up to gold, we don’t need it to reach new highs we just need to see it outperform gold. Silver is just starting to lead gold, below is the 1-month Chart showing both metal ETFs SLV is orange and GLD is blue

I admit that the silver leadership is fairly nascent but silver has more industrial uses than gold, yet still acts as a store of value as well since it is also a very popular physical purchase in the form of silver coins, as outlined in many of the same articles about Costco gold. So SLV I expect to be so strong that at times it will be positive even when GLD sells off. Check out this multi-decade chart for SLV.

We see a multiyear consolidation phase in the form of a huge inverse head-and-shoulders formation which is super bullish. Before that, to the left from the peak of SLV in the year 2011 we see a large rounded bottom that is also known as a bearish to bullish reversal with the nadir at about 2018 and then rising to nearly $28, since SLV is trading just above $25 right now, I am very comfortable holding a Long Call position of SLV out to June expiration and two tranches of 24 and 25 strikes. I started Calls at the 23-strike and rolled it up to 24 then added more at the 25-strike. As SLV (hopefully) rises toward the most recent high of Feb 1, 2021, of 27.98, I will be rolling Calls higher generating revenue while still staying in the trade. Let’s zoom in to a 5-year chart to get more detail.

Here we clearly see a full-on inverse head and shoulders, over a massive 5 years. I have little doubt as a chartist that chances are that not only will it reach the prior recent high of 27.98 but break out even more substantially. Of course, SLV does depend on GLD because at some point if GLD does retreat significantly it will pull down SLV with it. So let’s now look at GLD below is the 5-year chart.

Above is the 20+ chart with the first peak reached in 2011 the nadir was set in 2015. The chart shows a massive cup and handle which is very bullish. If you scroll up back to SLV to the multi-decade chart you see a similar formation but without the breakout as yet. Here for GLD, the breakout has begun. Long-time readers have seen me perform a measured move before. Here I drew two massive parallel lines and measured the difference and we have 80 points add that to the top line and you get 260, if you would plot out a chart in this way for physical gold we probably could get close to 2800 for gold as a possible peak. Nothing is set in stone of course but all things being equal, meaning the Fed keeps promising rate cuts, and the economy keeps chugging along precious metals will be doing very well.

My bullish stance is rooted in the consistent data outlining growth with low inflation

March employment numbers were fantastic! Non-farm payroll jumped to 303,000 yet unemployment ticked down from 3.9% to 3.8%, and the Labor-Force Participation Rate rose to 62.7% a rising participation rate means lower inflation as more individuals rejoin the workforce. Average hourly earnings went up .3% so on an annualized basis that would be 3.6% but the prior 12-month actual rise was 4.1% so employment costs fell, which also is disinflationary. We’ve seen productivity rising in the last several months so that can support higher wages or defray higher material costs to hold down inflation. As long as we hold the narrative that at some point the Fed is going to cut rates I think investor and trader appetite for risk remains. That means risk assets like GLD and SLV should rise.

Besides Gold and Silver, other metals are shining as well

I made some actual investments in metal stocks I bought Century Aluminum (CENX) based on that huge $500M grant from the US government here is the title of the press release that says it all: “Century Aluminum Selected by U.S. Department of Energy to Receive $500 Million Investment to Build New Green Aluminum Smelter to Accelerate Industrial Decarbonization”. I of course read this as CENX is building a brand-new aluminum smelter for free, or at least discounted by a half-billion bucks. This is the first smelter built in the US in 45 years, and I think they will make a lot of money from this new highly efficient smelter. Aluminum is in great demand, and so is copper so I invested in Teck Resources (TECK) as well. TECK is selling its metallurgical coal, which is used to make steel to Swiss-based based Glencore. To me, TECK is a value play because it is still viewed as a coal company with copper and zinc assets. TECK CEO Jonathan Price said that the sale should be completed by the 3rd quarter of this year. This gives me plenty of time to accumulate shares in TECK at a nice discount. The copper stock everyone goes to is Freeport-McMoRan (FCX) it has a PE ratio of 38.65 times while TECK’s PE is 13.62. Now I don’t expect TECK to nearly triple to match the FCX PE but somewhere between 13.62 and 38.65 can be a very satisfying appreciation I reckon. This risk is, somehow TECK does sell its coal mining business, I guess, or copper slams down, both seem unlikely right now.

The demand for copper and zinc is not going away, and if China starts growing again copper could move higher. However, I don’t even need copper to move up any faster to have a nice investment as TECK evolves away from coal. As always I will invest slowly over time, and with TECK there is certainly no hurry as the deal closes in the summer.

Ok everyone have a shiny trading and investing week!