Pretzel Logic

Now you swear and kick and beg us that you’re not a gamblin’ man 

Then you find you’re back in Vegas with a handle in your hand” 

–Do It Again, Steely Dan, 1972 

I recently had the opportunity to visit our GVA Advisors in Braintree, Massachusetts.  This week’s article is inspired by the great discussions we had about the melodic bass and jazz trumpet in some of the greatest music of all time.

Do it again, and again, and again . . .  It is amazing how financial markets repeat the same cycles over and over again.  A certain segment of the market suddenly gets hot, investors increasingly pour in to chase the narrative, by the time just about everybody gets on board the music stops, and the market gamble moves on to the next shiny investment object.  The latest headline grabbing investment du jour?  Mag 7?  That’s so 2023.  Today’s shiny investment market object is literally shiny objects.  They are gold and silver.  Let’s take a closer look.

We’ll begin with gold.  Uncorrelated with stocks.  Uncorrelated with bonds.  The yellow metal enters the asset allocation modeling conversation as a diversifier to manage correlation risk within a portfolio.  The only problem was that you simply couldn’t give away the “barbarous relic” up until recently.  No cash flow, no yield, no absolute metrics to measure valuation.  And worst of all it has been an asset that reached a price peak of $1920 back in 2011 and was trading at or below this same price less than two years ago at the end of 2023.  But what has happened since has been extraordinary.  From the start of 2024 through about six weeks ago, the price of gold spiked from around $2000 to $3400.  Amazing and much better than the headline dominating S&P 500 over the same time period.  And in the past six weeks since the start of September, gold has gone parabolic in rising from $3400 to over $4000.  In a word – wow!  And just like that, an asset that would get little more than looks of derision for more than a decade is suddenly getting talked about by everyone.

Next, we’ll focus on silver.  The white metal is gold’s maverick baby brother.  Industrial metal by day, precious metal by night, it trades with two times the price volatility of gold.  And it has been an exercise in unrelenting investor frustration for a half century.   In1980, the price of silver reached an all-time high of $49.45 (on a nominal basis – it may have only been worth fifty bucks in Philadelphia, but fifty bucks bought you a lot more back then versus today).  After more than thirty years of pain, silver finally returned to its previous all-time highs in 2011 at $49.51, only to repeat another down -80% over the next ten years.  But suddenly, this woebegone precious metal that was mired in a chronic downtrend through the start of last year suddenly started to come back to life in extraordinary fashion.  And on Thursday, silver briefly touched a new all-time intraday high of $51.19 before closing out the day just below $49 per ounce.  Forty-five years is a long strange trip to end up back in the same place, but here we are today, and everybody’s suddenly talking about it.

“I loved you more than I can tell

But now it’s stomping time”

–My Rival, Steely Dan, 1972

So what is an investor to do with these meet the new alternative global reserve currencies, same as the old alternative global reserve currencies following the cryptocurrency interlude?  They are just as uncorrelated to stocks and bonds as they’ve always been, so they still merit their place in the asset allocation model portfolio conversation as they always have.  But following their recently phenomenal run up, investors should definitely be careful out there in the precious metals market.  If an asset can double in less than two years and spike by +20% in just over a month, it can be cut in half or more in less than two years and drop by more than -20% in just over a month.  It’s the other side of the risk sword blade.  And given that gold’s Relative Strength Index (RSI – reading over 70 on scale from 0 to 100 means that a security is overbought and overdue for a meaningful pullback) reached over 87 on Thursday (in a three letter acronym in all caps – OMG), things have gotten a bit out of hand to the upside and is overdue for a meaningful breather.  Silver is in the same camp with an RSI of just over 80 on Thursday.  In short, these prices could continue to run to the upside, but don’t be surprised if they break sharply back to the downside any day now.

But for this Chief Market Strategist, the bigger story is not what gold and silver are doing specifically.  Instead, it is what the recent run up in gold and silver are signaling generally for the broader market.  Overall, it is unsettling.  Exactly what it is signaling remains to be seen, and there are no shortage of “experts” opining on the specific drivers of “why?” (one can easily shoot holes in many of these explanations, so be sure to do your own homework and verify what you are hearing), but such pricing disconnects in safe haven assets whether they be to the upside or the downside are often early warning signals of what is eventually to come.

So what does this Chief Market Strategist think the run up in gold and silver is signaling today?

First, that the abundance in liquidity in the financial marketplace has become so pronounced that it’s now spilling over everywhere including into gold and silver that are arguably some of the most liquid asset class categories in the markets today.  Is there gas in the car?  Yes, there’s gas in the car today.  A lot of it.  And this gas may continue to push asset prices including stocks, bonds, precious metals, and everything else that cannot be bolted down to the upside through the remainder of the year and into the start of 2026.  After all, if you’re an institutional money manager and your livelihood depends on allocating client assets to financial markets, and you’ve been sitting things out waiting for a repeat of the correction that afflicted markets earlier this year from February to April, you’re likely feeling increasing pressure to get back into the markets with each passing week between now and the end of the year before 2025 runs out.

Next and perhaps more importantly, an excessive abundance of fiscal and monetary liquidity both here and all around the world that can fuel asset prices higher today (see 2021) can increasingly flood into the broader economy and cause a scorching inflation problem tomorrow (see 2022).  But unlike last time when the Fed had the flexibility to pull the emergency brake with more than five percentage points of rate hikes in short order to arrest the last inflation outbreak, the Fed is simply not going to have this ability the next time around.  If anything, they may be adding even more fuel to tomorrow’s inflation fire today.  Those pouring into gold and silver are likely starting to position in advance for this possible outcome, even if bond yields and/or the forward looking inflation data is not yet signaling such an outcome.  Remember that the 10-year US Treasury yield was still around 1.50% at the end of 2021 and breakeven inflation rates were still at 2.4% in September 2021, but inflation was running wild only a few months later.

“Double helix in the sky tonight

Throw out the hardware

Let’s do it right”

–Aja, Steely Dan, 1977

Bottom line.  Shiny objects come and shiny objects go from financial markets year after year.  It was true fifty years ago, it’s true today, and it will be true fifty years from now.  And there’s absolutely nothing wrong with owning these various shiny objects all along the way.  The key, of course, is to purchase them when they are still dull instead of chasing them when they are gleaming brightest.  This reinforces the importance of remaining dedicated to the principles of broadly diversified asset allocation in investment portfolios.  For if you have invested capital across a broad range of uncorrelated asset classes that includes categories that are strongly in favor and those that may be lying in wait, your portfolio is prepared in advance for the expected and unexpected events may be yet to come, both good and bad.  These principles have also been true since the beginning of investment time, and will continue to hold true no matter what may be leading capital markets to the upside at any moment in time.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Investment advice offered through Great Valley Advisor Group (GVA), a Registered Investment Advisor. I am solely an investment advisor representative of Great Valley Advisor Group, and not affiliated with LPL Financial. Any opinions or views expressed by me are not those of LPL Financial. This is not intended to be used as tax or legal advice. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Please consult a tax or legal professional for specific information and advice.

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