Since the post-recession global growth rate and inflationary pressures peaked in 2011 precious metals have been a disaster zone featuring short, counter-trend rebounds in the context of a long, sickening slide. Gold has lost 32% over that time. Silver has lost more than 56%.
The slide intensified earlier this year as it looked like the Federal Reserve would pull back on its $85 billion-a-month bond purchase program. And even now, in the midst of the government shutdown and the approaching debt ceiling deadline, both gold and silver have been in a month-long pullback.
That’s changing on Monday as silver blasts back above both its 20-day and 50-day moving averages. (Gold is also moving, but the rebound is less intense.)
What’s driving this?
For one, the market’s recent complacency with the fiscal battle in Washington is giving way to a realization that no compromise is coming and that we’re likely to run straight into the October 17 debt ceiling deadline. Once we pass that date, Social Security checks could soon be delayed, the credit rating agencies could render more downgrades, and the markets will have no choice but to react in a repeat of the August 2011 chaos.
Both President Obama and GOP House Speaker Boehner are digging into their positions. Obama doesn’t want to negotiate unless the government reopens and the debt ceiling is raised. Boehner wants a one-year delay of the Obamacare individual mandate and claims that there aren’t enough votes in the House to pass a “clean” continuing budget resolution.
The spirit of bipartisanship is buried six feet under.
Two, the dollar is looking vulnerable to a breakdown here that could potentially send it below its mid-2011 lows. That would be inflationary, since it would boost import prices.
And three, there is an intensifying scramble by investors into safe haven assets. The iShares 20+ Year Treasury Bond (TLT) just posted its first upward cross of its 20-day and 50-day moving averages since April. The CBOE Volatility Index is on the move too, returning to highs seen briefly in December during the fiscal cliff fight and again in June during the selloff over the threat of a Fed “taper.”
If the VIX pushes above 20, it would break above its 200-week moving average for the first time since the August 2011 debt ceiling fight — and end the three-year volatility downtrend that followed.
Silver’s role as a safe have, an inflation hedge, as a dollar alternative, and as a refuge from the buffeting about to hit stocks should keep its new breakout going. I don’t know how long it’ll last, but it’s definitely tradable.
Click to Enlarge In response, I’m adding the VelocityShares 3x Silver (USLV) to my Edge Letter Sample Portfolio. An existing position in the VelocityShares 2x VIX (TVIX) is already up 15% since I added it on October 3.
Anthony Mirhaydari has recommended USLV and TVIX to his clients.