Don’t Fear The Precious Metals Pullback!
Hear that?
It’s the sound of gold bugs pulling their hair out.
After a strong performance in August and September, gold’s struggled mightily in recent weeks. In fact, the yellow metal is falling below $1,700 an ounce this morning… a 5% drop from the recent multi-month highs of $1,790.
The same goes for silver. The lustrous metal dropped from $35 an ounce in early October, to just under $32… an 8.5% monthly drop.
And one thing’s for certain, this recent bout of weakness isn’t exactly what precious metal bulls had in mind. After all, now that Ben Bernanke’s plowing $40 billion a month into the US financial system, gold and silver should be surging… right?
Well, the short answer is- yes. Gold and silver should be roaring higher now that QE3 is going full-steam ahead.
But like many things in life- the devil’s in the details.
Let me explain…
First of all, take a look at the recent performance of the US Dollar…
As you can see, the US Dollar hasn’t budged over the past few weeks. In fact, the dollar’s actually gained ground- the opposite of what precious metals need to continue higher.
Remember, there’s a strong inverse correlation between precious metals and the dollar. When one goes up, the other generally goes down.
But dollar strength isn’t the only thing holding precious metals back…
Our friends at Moore Research constructed a wonderful chart revealing the seasonal tendencies for gold over three different time spans- 30 years, 15 years, and 5 years. And as you can plainly see, gold has almost always endured a pullback in October across all three time frames (red circle).
Given the charts above, it’s no wonder the yellow metal’s underperforming in recent trading. And since silver usually walks in big brother gold’s footsteps, it generally follows the same seasonal pattern.
But don’t think for a second that these metals have seen their best performance for the year…
Take a closer look at the chart from Moore Research. Over the past 30 years, gold’s almost always rallied in the final two months of the year. Given this strong seasonal tendency for a year-end rally, it’s likely gold and silver’s underperformance is about to come to an end.
Now, let me show you something else I’m watching…
The blue line in the chart above is that of miner Silver Wheaton (SLW), and the red line is that of gold miner Agnico-Eagle Mines (AEM). Notice how both these industry-leading miners are jumping to new multi-month highs in recent trading.
That’s a great sign…
The fact that miners are holding onto big gains from recent months- and actually trading to new highs– is a great sign for the commodities they produce. In other words, it’s extremely bullish for gold and silver that AEM and SLW are exhibiting such strength.
So whatever you do, don’t let October’s weakness fool you…
We’re merely seeing seasonality in gold and silver prices over the past few weeks. What’s more, it’s highly likely both metals are on the verge of rallying to higher ground.
How can you profit from this looming trend?
The SPDRs Gold Trust (GLD) and the ETFS Physical Silver Shares (SIVR) are great ways to capitalize on rising precious metal prices.
But another interesting way to capture gains is through ETFs holding various miners. For example, the Global X Silver Miners ETF (SIL) holds the aforementioned SLW, along with other industry leading miners like Pan American Silver (PAAS) and Coeur D’ Alene Mines (CDE).
Until Next Time,
Justin Bennett
Category: Commodities
