Metals are not going to stop crashing until the US dollar turns.
I’ve been banging on about that for some time. I don’t know when that will be; nor does anyone.
But this US dollar action feels like the parabolic blow-off that you get towards the end of bull markets, rather than the creeping disbelief you get at the beginning.
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I’m hearing talk of forex interventions coming – that may or may not be so, so I’m not ready to pull the trigger just yet.
But…
Platinum looks cheap, regardless of what happens next
I’m closely following the price action of two metals that look remarkably cheap. They are silver and platinum. I mentioned them last week.
The case for platinum, the main use of which is in catalytic converters for diesel engines, is pretty simple. You would normally expect it to trade at a 25% premium to gold; that is the historical average. But demand has been shattered since the Volkswagen emissions scandal of 2015 and the subsequent move away from diesel engines.
Gold is currently at $1,720/oz. If history is any guide, platinum “should” be above $2,000/oz. It isn’t, though; it’s $830.
I don’t really know what’s going to change on the demand side. Platinum may have a major role to play in fuel cells and the hydrogen economy (as a catalyst), but so far this has not been perceived as being enough to push the price higher.
In any case, here is a 20-year chart of platinum. I’ve drawn a dashed blue line around $780 and you can see the platinum has been below this level just once in almost 20 years – during the corona panic of March 2020.
It went to $600/oz intraday back then. Otherwise the $770 area has been the floor.
So if you can pick platinum up below $800, let’s just say your downside is likely to be limited.
And now to the perennial great disappointment that is silver
Silver is not quite as clear cut. Oh, silver! How I used to love it back in the noughties. Experience changed my view.
Was there ever a metal with so much potential? Silver is to electronics and modern tech as sugar or salt is to food – it is in just about everything.
Then there is its monetary allure as well. Didn’t silver go to $50 during the inflation of the 1970s? Aren’t you supposed to take refuge in precious metals during inflationary episodes?
Here we are in 2022 and silver has fallen off a cliff. It’s sitting at $18.
For five years between 2015 and 2020 that $19-$20 area was resistance. Technical analysis 101 says $19-$20 should now be support. But silver – being silver – has cut straight through it.
It went to $12 in the corona panic and $8 in 2008, but the $14 zone has for many years been a pivotal price zone.
Here’s a long-term chart with a dashed line drawn at the $14 mark.
Can it get to $14 on this move? It would be extraordinary, given the amounts of money that have been printed, for it to go that low. There should be some support at $18 and at $16, but it’s silver, so never underestimate its capacity to disappoint.
If the US dollar index goes to 120, a number I’ve been harping on about for months, then silver will get that low. And in a panic it will probably surpass it (if surpass is the right word).
As I say, I’m not quite ready to pull the trigger. My appetite for risk has been somewhat tempered by the market action of recent months. But, as with platinum below $800, your downside is limited buying silver at $14 or below.
When I say buying silver or platinum, I don’t necessarily mean going down to the bullion shop and buying bars, nice though they are. I mean physical metal stored in vaults, ETFs (exchange-traded funds), mining companies, even options or spread betting the price (though these last two are only for the experienced and highly risk-aware, so if you don’t already know how to do it, I suggest you don’t).
If we get to those kinds of levels, I’ll put out another piece explaining in more detail some ways to play it. I must say if silver goes to $14 I’m likely to get out the leverage.
But I’m not quite ready to pull the trigger yet. Bottom fishing is a dangerous and often expensive game. However, silver and platinum are very much coming into the “buy” zone. And at a certain point they will be irresistibly cheap.
I’d say we are nearly there, but not quite yet. Patience…
Dominic will be performing his show, How Heavy?, a lecture with funny bits about the history of weights and measures, at the Edinburgh Fringe this August. You can get tickets here.
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