Why My Accounts Are Over-Weighted In Precious Metals

The topic du jour ought to be the precious metals rally and the implications this might be having for the USD in the important behind-the-scenes negotiating weeks ahead of the Sept 24-25 G-20 meetings in Pittsburgh.

The gold chart shows a triple top with possible upside break-out. It’s hard not to see it that way after the $GOLD futures soared +$23 yesterday.

http://tinyurl.com/2marc

The Silver chart, however, shows a steadier advance, perhaps ready to move to $17 from its price of about $15.72 this morning.

http://tinyurl.com/3839gy sil17

But, all along in these pages I have been saying that my accounts are over-weighted in precious metals, and that I believed we would see $1,000 gold soon, plus or minus $20. There have been a lot of dissenters. The spot price this morning was $987, so I suppose the opposition is ebbing quickly.

In any case, in yesterday morning’s conference call, I remarked that I wanted to increase the weighting from 7.27% to 9.0%, which we did (8.92%), and that I had made that decision right before the close the day before but pulled back from saying it because of my priority #1 being risk management. What I said was that I believed we were in the final rally of this intermediate term cycle for the precious metals, and that the prior day’s move in precious metals was not linked to higher goldminer prices because the broad market was getting hammered, which is when the babies get tossed with the bathwater. I opined that if the market was to be flat or moderately down during the session, I believed we would see a spike in the goldminers. That happened as $XAU soared +8.6% and my favorites Silver Wheaton, Goldcorp and Kinross were up 10 to 11 percent (SLW +11.2% GG +10.1% KGC +9.9%) on the day.

Market prices tend to move two steps in one direction and then pullback or recover one step. In the heat of the day to day action, it’s often hard to see that, so, at times, you need to step out of the trenches and back to where you can survey the whole battlefield. With respect to precious metals, here is what I observed. The palladium chart has been showing a continuous advance.

http://tinyurl.com/m4yd9a pal200

You need to weigh all the evidence, so as long as I saw palladium making that move, and none of the sisters (gold, silver and platinum) breaking down, I figured that their pull-backs would be deceptive and short-term moves only.

But, we are at a point now where the $USD could make a break from the lower end of a 78-81 trading range to maybe 74. In terms of the implications of future inflation in America, or the ability to sell Treasury debt to foreigners who would be worried about cashing that debt in on maturity for what I call wooden nickels, I cannot see the USD going further south than 73-74. If it did, the future of the US would be so bleak that major policies would be needed changing, like withdrawal of all troops in foreign countries, postponing indefinitely the healthcare reforms (which I believe will come in stages by the way), and eliminating much of what the workers have earned in the form of pensions.

Frankly, I don’t see that happening. There are too many vested interests that would fight it, so what I do see happening is tough love being forced upon the average American, and by that I mean the equity market is going to have to take a swan dive.

So, that’s where I stand today. I think the USD will be protected and the equity market Bulls are not going to be happy campers. Pensioners are going to be disgusted. Family estates will be eroded further, and so the heirs will be disappointed. It’s not a pretty scenario, but I think the odds of it happening are significant, much greater, I believe, than 70:30. That’s why I’m nervous.

That’s why my accounts had equity short positions of -13.2% gross, which after netting out the longs, still was -7.9% short. Yes, I am also short bonds (-3.2%), but those are almost all at the long end and are almost all dated December, by which time I do think that economic recovery and inflation will be topics of frequent discussion here.

Inflation is already being seen in many countries. Today it was reported that food prices in India have risen +14.5% Y/Y. That will happen in America too unless the level of the $USD can be held at current prices.

You have to see the big picture, and you have to step back at times to do it. I do it every day.

Have a great day.

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