It's turning into an ugly summer for the precious metals.
This is often the way. June, July and August tend to be when gold and silver are at their weakest (although the reverse was true last year).
There might be a potential "flip" trade on to accumulate now, with a view to exiting in the autumn. But a full-on, multi-year bull market in gold and silver? My view is we're still a way from that.
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A very disappointing year for precious metals
And, oh my goodness, silver has been behaving like the reverse of some moon-bound cryptocurrency. In early June, $18 looked to be on the cards. Then, a week ago, on Friday, it went below $14.40 at one stage. It has since rallied to $16, but, dear me, the days of $50 silver look so remote now, it's like they never happened.
Many of us got very excited over the first six months of 2016, when precious metals and miners shot up so dramatically. It now seems this was little more than a counter-trend rally from oversold levels, not the beginning of some new bull market. The bear has resumed its grip.
I'd love to be able to declare that the bull market in gold and silver is back on. Gold and silver bull markets are wonderful things. Maybe the bull market begins tomorrow. I hope so. But I'm afraid that, depressing though it may be, I have to be honest and say I can't see it. The conditions aren't right.
From a technical point of view, we're seeing range-bound, going-nowhere action. There's no trend in place. Or if there is one, it's down.
From a more psychological point of view, for a gold and silver bull market to take hold, we need to see precious metals at such extraordinarily low levels that they become compellingly cheap compared to other assets, as they were around the turn of the century.
Back then, an ounce of gold was 45 times cheaper than the Dow Jones index; now, the Dow is about 17 or 18 times the price of gold. Gold and silver are cheap, but they're not that cheap.
When they get 1999 cheap, and buying comes in, then an upward trend can form. There's no better advert for a market than a rising price. Once we have that, new narratives can take shape and the bull market self-reinforces. But we have no trend, just a gruelling range-bound dirge with a bearish bias.
We need triggers. In 2001, people turned to gold as they fled stockmarkets after the dotcom crash. Ditto post 2008. From being a forgotten asset there grew a genuine belief that the monetary system was broken and that gold was the solution.
Such beliefs may well be even more correct now than they were then. But the problem is there are fewer such believers; there is no common narrative to give such a bull market impetus. The "money-is-broken" narrative has moved over to bitcoin. The stockmarket is rising and acting as a perfectly good hedge against inflation. Why bother with gold?
Meanwhile, the perception that long-overdue, higher rates are coming, both in the UK and in the US, has taken hold. I'm not sure significantly higher rates are even possible without a monumental crash of some kind, although marginally higher rates look possible. Nevertheless, higher rates are deemed bad for gold too.
We're miles away from a bull market in gold
My feeling is that we're not near lift off. We're not even on the runway yet. It might be that we're not even in the airport, nor in the taxi there. In fact, to stretch the analogy one stage further, perhaps we are not still fully landed from the last cycle.
After gold's bonanza decade in the 1970s, there followed 20 years of bear market. I hope we won't need 20 years of bear market this time around. But I can easily envisage an eventual return to $1,050 to retest that late 2015 lows, before take off. That would only be a 15% slide from here.
Gold has a habit of making a low then re-testing it two or three years later. It did this in 1982 and then 1985; it did it in 1999 and 2001. Perhaps 2015 and 2017-8 will see another such occurrence.
All that said, in the nearer term, gold has reached extremely oversold levels, from which a might be possible to stage some kind of relief rally. The percentage of bulls is almost as low as it was in early 2016. Momentum is equally stretched. There is some historic support around the $1,200 level. And 2016 apart, June-August is often a good time to be buying.
The ratio of gold to silver has touched 80. If that can go a bit higher we'll be looking good for a relief rally. When gold is 85 times the price of silver that marks a point of extremity from which you often see rallies in the price of precious metals (particularly silver).
These are all reasons for a potential flip trade with a view to exiting later in the year. But a major investment in a long-term bull market? I don't see it myself. Not yet, anyway.
I hope I'm wrong. I often am.
Dominic Frisby (“mercurially witty” – the Spectator) is the world’s only financial writer and comedian. He is MoneyWeek’s main commentator on gold, commodities, currencies and cryptocurrencies. He is the author of the books Bitcoin: the Future of Money? and Life After The State. He also co-wrote the documentary Four Horsemen, and presents the chat show, Stuff That Interests Me.
His show 2016 Let’s Talk About Tax was a huge hit at the Edinburgh Festival and Penguin Random House have since commissioned him to write a book on the subject – Daylight Robbery – the past, present and future of tax will be published later this year. His 2018 Edinburgh Festival show, Dominic Frisby's Financial Gameshow, won rave reviews. Dominic was educated at St Paul's School, Manchester University and the Webber-Douglas Academy Of Dramatic Art.
You can follow him on Twitter @dominicfrisby
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