(Two theme songs today: Rolling Stones and Shirley Bassey)
We haven’t written much about gold and silver recently, and that’s on me. I’ve been meaning to write pieces about precious metals on various days, but then something came up on each of them. Many investors and active traders clearly have been participating in the huge run-ups that each of those metals have experienced recently and today can’t be a pleasant one for those who have been chasing the rapid moves higher. As the chart below shows, gold futures have been on quite a tear over the past three months (and more), while silver futures went parabolic recently.
3-Months, Front-Month Futures in Gold (red/green daily candles), Silver (blue line)
Source: Interactive Brokers. Past performance is not indicative of future returns.
Today’s significant declines in gold and silver (-5% and -7%, respectively, as I type this) do not necessarily puncture the bull market narratives behind those commodities, but they once again heir out the risks of chasing sharp upward moves, particularly those that become parabolic. We have written before about how unpredictable those moves can become, particularly because parabolic moves often indicate that some market participants are in real pain. The problem is that when their malady is cured, at least temporarily, the main impetus for the parabola is removed, and those who chased it are left long without a natural buyer. That means that the supply/demand calculus changes abruptly and with no warnings.
There were numerous news reports about a global short squeeze in silver, but when it became clear that the supply now met the demand, the market dynamics reversed. Actually, we saw a bit of a sell-off in metals on Friday, but dip buyers stepped in yesterday as if on cue. This is where trading dynamics fall victim to larger considerations of supply and demand. This is where our admonition from last week comes into play:
It is very difficult to know if a wave of selling is part of the normal flow, a rogue wave, or a shift in the tides.
If you’ve been chasing the rapid rise in metals recently, ask yourself now if you can reasonably assess the relative probabilities of normal flow, rogue wave, or tidal shift in those markets. If you’re new to trading those markets, please recognize the difficulty of an accurate assessment.
Disclosure: Interactive Brokers
The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Interactive Brokers, its affiliates, or its employees.
Disclosure: Futures Trading
Futures are not suitable for all investors. The amount you may lose may be greater than your initial investment. Before trading futures, please read the CFTC Risk Disclosure. A copy and additional information are available at the Warnings and Disclosures section of your local Interactive Brokers website.
Disclosure: Precious Metals
Precious metals may not be available in all locations, please check your local IBKR website for availability.
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