(Money Metals Exchange) Precious metals markets are ending the week on a sour note – and the general stock market is rallying.
Stocks started the month in negative territory after President Donald Trump said that a trade deal with China could be delayed. Trump suggested that China would prefer to wait until after next year’s election.
The President apparently believes he can get re-elected without a trade deal. But he has staked a lot of his presidential prestige on a rising stock market. One way or another, his administration will be working to juice financial markets and the economy in the months ahead.
He obviously doesn’t believe he will be forced out of office through impeachment. Investors don’t believe Trump will actually be removed from office. Even the House Democrats leading the impeachment charge don’t believe Trump will actually be removed from office! At this point, nobody does.
It’s a sideshow contest to see which party will score the most political points – as they position themselves for the 2020 elections. If more Democrats than Republicans end up breaking ranks on impeachment votes, it would be a huge embarrassment for Nancy Pelosi, a huge problem for the eventual Democrat nominee for president, and a huge win for Trump.
Will precious metals prove to be a winning investment in this environment? Well, they certainly haven’t been a losing investment this year. Gold and silver may be gathering strength for something bigger ahead.
After a pullback today in metals as a result of a better than expected jobs report, gold is now essentially unchanged for a second week in a row and trades at $1,464 per ounce.
Silver, meanwhile, was trading around the $17 level for a fourth straight week but it’s taking it on the chin today with prices dipping below and currently coming in at $16.67 an ounce to register a 2.5% weekly decline.
Silver’s trading range has been tightly compressed, which usually signals a big directional move ahead. One clue as to which direction prices will head next can be gleaned from the action in the silver mining stocks.
The major silver miners ETF is exhibiting a positive divergence, advancing over 4% to break out above multi-week resistance levels. This indicator is somewhat compromised by the fact that most so-called silver mining companies end up deriving most of their business from other metals.
Nevertheless, we are seeing a similar positive divergence with the GDX gold miners. The ETF is now trading above its 50-day moving average for the first time since mid-September. Gold itself closed just below its 50-day average on Thursday.
Precious metals mining stocks often lead the metals and amplify their moves. They could be setting up a more bullish environment for silver in particular. Top producers have reduced their silver output by 4.4% year over year even as they have increased their gold production.
It makes sense from a business perspective since silver has traded at an extreme discount to gold this year. The market told mining companies that it valued their gold ounces much more dearly than their silver ounces. But the decline in silver production in turn means that the gold/silver ratio is likely to narrow in favor of silver.
We have already seen some narrowing since the summer. There is a lot more yet to come if the gold/silver ratio is to return back to its historically normal range.
The surest way to profit from the ratio trade is simply to own the most out of favor metal – in this case silver. There are many advantages to owning physical bullion and avoiding futures, ETFs, mining stocks, and other paper proxies for the metal. Bullion carries considerably less risk and its market value more reliably reflects the true physical market.