Be Right, Sit Tight

The gold price has been at all-time highs recently as the silver price has been pulling back. Now global equity markets are in turmoil while a new war in the Middle East looms. Is it time to buy? Is it time to sell? Maybe. But sometimes the best thing to do is nothing at all.

Understanding the Current Market Turmoil

As I type this on Monday, August 5, the entire world seems to be in turmoil. This sort of setup is usually pretty good for the precious metals, and we'll get to them in a minute. But first, let's take note of what's going on in the world before deciding whether or not to use the current volatility to our advantage.

The primary concern today deals with global liquidity and margin calls. Not unlike 2008, the global equity markets are tumbling today as liquidity demands drive an almost panic-level of selling. What's driving this? A few days ago, the Bank of Japan reversed decades of zero and/or negative interest rate policy and raised their central rate to just above zero at 0.15%. This may not seem like much to the naked eye, but the impact on the "global yen carry trade" has been significant.

What is the "global yen carry trade"? In short, it's a means of easy liquidity for traders to inflate and leverage their positions. A forced unwind of this leverage is what is driving the selling. To save time, here's a brief and simple explanation of how the carry trade works:

Anything with a bid gets sold in the early stages of this type of unwind. This applies to COMEX Digital Gold and COMEX Digital Silver, as both are traded 23 hours per day and both are down sharply as I type. Global equities are down, too, with the S&P 500 down about 130 points. Again, in periods of urgent liquidity needs, if it has a bid, it gets sold—regardless of the fundamentals.

Market Recovery Prospects Amid Gold Price and Silver Price Fluctuations

Now the question is: Is this contained? Could we be seeing the lows of the week, and will all markets be quick to bounce back and recover? Maybe. But maybe not. In 2008, a similar forced unwind of leveraged positions led to a market collapse that threatened the viability of the entire financial system. We're not there yet, obviously, but you must not take anything for granted.

Some will publicly cry for an immediate and "emergency" fed funds rate cut to remedy that situation. While any sudden rate cut might lead to a quick pop in the markets, in actuality a rate cut might be the worst option for the Fed. Why? Again, this situation is being driven by a strengthening yen, and a U.S. rate cut would likely weaken the dollar and make the yen even stronger. Oops. So, be careful what you wish for here as it pertains to the Fed.

The other big concern this week has to do with geopolitics. As I type, the Middle East stands at the precipice of war. Unlike last April, when Iran and Israel traded mostly symbolic missile barrages, the current situation looms as the sort of all-out war the region hasn't experienced since 1973. Perhaps the global markets will stabilize if the carry trade concerns fade, but what happens if war in the Middle East leads to a closure of the Strait of Hormuz and Suez Canal?

As such, perhaps this is a good week to simply stand down and observe. There's an old market adage about being right by sitting tight, and that certainly seems appropriate today. While I have no doubt that all these current events will eventually lead to sharply higher precious metal prices later this year, it's impossible to know what prices might do in the next few days. 

And price charts are of very little help in these situations. Personally, I've been waiting for a dip to $2400 in gold and something near $26.50-27.00 in silver. But here we are—we reached those levels earlier this morning—yet I'm not doing anything. At least not yet. There's just too much uncertainty as this volatile week begins.

In summary, my personal position at this time is to sit tight, watch, and learn. Again, all of these events, plus the rapidly-weakening U.S. economy, will create conditions where gold and silver prices rally again soon. Soon. But maybe not just yet. Check back next week and we'll see if things have gotten better...or worse.