Close to the Bottom in Gold and Silver - Weekly Wrap Up

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Craig: Welcome back to the Sprott Money News "Weekly Wrap-Up." It's the first Friday of March, March the 5th, 2021. I'm your host Craig Hemke. Eric is still sidelined this week. And so, joining us is David Brady. David is my fellow contributor at the Sprott Money website. He writes an article every week. So, you should visit sprottmoney.com and check that out. It's usually Thursday or Friday each week that they post it. But he's also a fantastic technical analyst, not just simply looking at the charts but also factoring in fundamental things as well, a full picture. And you can find him on Twitter and he's a great follow at the handle GlobalProTrader, all one word. David, thank you for joining me this week.

David: Hey, Craig. Listen, thanks very much for having me on again.

Craig: You got big shoes to fill, my friend, after Rick Rule last week and, of course, Eric once he gets back, but I know you can handle... You've been on before and you do a great job. And again, I can't emphasize enough the value of if you're on Twitter following David, again, GlobalProTrader. David, we've had an interesting week, obviously, so we should start there. A lot of expectations given the rise in yields that Chairman Powell would say something yesterday to kind of ease what seems to be a growing liquidity squeeze, and yet he did nothing. We've got the FOMC meeting coming up a week from this coming Wednesday. So, we're still talking 12 days away. What do you make of the current action in the metals? And we'll get to kind of future stuff in a minute.

David: Yeah. well, really there's a number of factors involved, but one of the principles right now is the real yields and nominal yields, given that the official inflation rate to CPI, which is a joke, but given that's been relatively constant over the past few years, real yields, nominal yields its more or less the same thing. What we're seeing right now as you know is that real yields have spiked recently. They bottomed out August 6th, August 7th, same with nominal yields. And for that reason, we've seen gold and silver come under pressure. But the light is at the end of the tunnel here because...I've posted this on Twitter, most people look at the 10-year and yes, you should look at that, I use that for the real yields, but for the nominal yields, the best chart I have is the 30-year because the 100-month moving average on that has been tested numerous times over the past 30 years going back to 1990. So, it's time-tested, and back in October of 2018, September, October of 2018, when yields were spiking up towards 100-month moving average, I said if we go above that or hit that line or go above it, go long bonds because we're going to go sub 2% or 1% in the yield. And it was based on the reliability of that moving average over time. Well, here we are again where we went down to you know, below 1% and now we're going back up. We're around two points...I think we hit a high of 2.41% and we hit an RSI of 84 in the process.

What I'm looking for on the daily chart is a negatively divergent higher high. What that means is yield going above 2.41%, perhaps as high as the moving average itself to 2.75%, but in the process registering a lower RSI. That's a negatively divergent higher high, and that's the ideal scenario for me for a peak in yields and then they start to head down again and the same with real yields. Now, what will trigger that, even though Powell, you know, did not meet people's expectations in his speech yesterday, I fully expect that they are going to come in and intervene to cap yields. Look, as far as I'm concerned and I'd like to get your opinion too, Craig, they have no choice. Because with the amount of debt and the amount of money printing that they're going to do, you know, per the IMF and then what Biden is doing with his $2 trillion stimulus, that's just the beginning, they are going to have to buy all of that debt. So, that means the debt is going to explode even further. Well, if the yield on that debt goes north of 3% on the 30-year, 1.5% to 1.6% on the 10-year, the interest cost on that debt will be greater than the tax receipts of the United States. Now, take this down to an individual. If you've got credit card debt and your income can't even meet the minimum payment requirement, you're technically insolvent, you're bankrupt. And that's the situation that the U.S. risks if yields go much higher and the Fed knows this. So, they're absolutely going to step in. The alternative is collapse of everything.

So, it's only a matter of time and I'm looking at that 30-year yield, in particular, and I think we're going to see the same thing again. We're going to see that move up a little higher here potentially, it may have topped, but I think we can still have room on the upside. The Fed steps in, they're going to cap yields, and whether yields go down or stay where they are, the fact that they're printing money and some of that money will find its way into the economy, and actually, I think the amount that goes into circulation will increase going forward. I mean, can you imagine if we get UBI at some point? And that is going to cause real yields to drop. There's an asymmetric risk to the downside in real yields. And once we get that, you know, gold and silver are just going to explode higher. I mean, I know it's a lot of pain to endure for the precious metals investors and we've gone through this, but you know, everybody has a short-term memory. We went from $1,167 in 2018 to $2,089 in August. I mean, that's a near $1,000 rally. Let's keep ourselves in check here. And since then, we've had a $400 plus retracement. I think there's a rally coming that's going to supersede the previous high. And everybody has to get ready for that. But I love the bearishness. I love the increasing bearishness. Getting targets on the downside of $1,500, $1,400, $1,300, $1,000. I love to hear that stuff. The reason being sentiment is a wonderful contrarian indicator in gold and silver. It's time-tested for years. And when you hear this side of bearish sentiment after all the bullish sentiment we had at the peak, you know that the end is near here on the downside and that we're close to bottom, and I believe it's coming in days, a couple of weeks tops.

Craig: Well, that's good to hear. Yes, I'm watching those real yields as well. That's going to be the key. And Fed has a history, you talked about charts with a history, the Fed has a history as well of managing the debt by trying to inflate it away by imposing yield curve control. That's what they did after World War II. Dave, the hard part is picking out where that rate might be the nominal rate. You mentioned some numbers earlier that you're watching. Was that on the long bond, the 30-year long bond?

David: Yes. That 100-month moving average is at 2.75% currently. Back in late 2018, it stuck its nose above there, the yield, but it turned out to be the correct call. If you'd gone along there, you would have made a ton of money. And it could do the same thing again. So, 2.75% to 3% if it gets there. It doesn't have to. But once you start seeing it going back down again, that's when gold and silver bottom then it goes north.

Craig: All right. We always get a handful of questions each week. Not as many as when Eric is here, but we always invite your questions at the email address submissions@sprottmoney.com. I've got three of them here that I think I'd love to get your opinion on, David. Let me just start with the first one. You know, we're talking about another $1.9 trillion in U.S. stimulus on top of the $900 billion a few months ago and everything that was done last year. You know, there's this idea that all this money printing should be reflected, you know, it's devaluing the existing dollars adding to the debt. You'd think gold would be going higher, but as we've talked about the price of gold traded by...you know, found by trading of derivatives and the derivative key off of real interest rates primarily. So, that's that answer there, but what do you think, and will there a bounce, maybe we get this turn when that stimulus package is passed if it passed. What do you think about all that?

David: Well, let's take a step back. If you look back at March 2020, one of the trigger points for the rally in gold and silver was the Fed, Powell coming out on that Sunday and slashing the Fed funds rate by 1% overnight. And at the same time saying that they would do whatever it takes to support the economy and so forth. What happened next? Gold and silver just shot higher. We got to August, you know, I made a call back in July ahead of that, that one of the specific reasons why I expected that gold and silver were going to run into peak and then pull back significantly was because the Fed has signaled that it's going to cut back on stimulus, which it did. It cut it by 75%. And then in August, everybody expected the emergency benefits for the unemployed to be extended. I said there's a risk that they don't extend it. That's the risk on the fiscal side, and that's exactly what happened. They allowed them to expire. So, when you had monetary stimulus slashed 75%, fiscal stimulus cut off, what did gold and silver do? They peaked and went down. Now, here we are on the other end of this, Biden's announced, let's round numbers, $2 trillion in stimulus. You think that's the end of it? No, universal basic income is next. The IMF came out in January and told governments around the world to spend, spend, and then spend some more like drunken sailors. This is only the beginning. Liquidity is what drives markets and when the Fed and the government combined, MMT are, you know, spending money like drunken sailors back in March through June, July, gold, and silver rocketed higher. Once they took their foot off the accelerator, gold and silver peaked and went down. Well, what's happening now? They're starting to pedal to the metal again. So, yeah, it's only a matter of time. Gold and silver are coming close to the bottom here and it's going to go much higher. We're going to get new record highs in gold and potentially in silver too.

Craig: How about this one, you mentioned silver, often it seems that gold leads silver, you know, silver kind of straddling the divide between a monetary metal and an industrial metal. Silver has been doing much better than gold at least as of late until this week. Why is that do you think?

David: Well, the bull market for me in precious metals has been established. If you look at a monthly chart or weekly chart, you can see we're getting higher lows and higher highs. What typically happens in a bull market as you know, Craig, is yeah, gold leads the way, but silver plays catch-up and just blows and waves goodbye to gold as it passes it by. Well, when we were in that rally going up to $2,089 in gold, that's exactly what happened. Gold started the rally, same as in December 2015, and silver bottomed in January 2016, silver played catch-up and passed it by, and we've seen that. And, you know, just to use basic economic or financial theory, silver is like a high beta play on gold, which means that when gold goes up, it may lead, but silver is gonna blow past it. And we've seen this in the bull markets from 2000 to 2011, from 1974 to 1980. In each case, silver outperformed gold with a beta of 1.5%. And there's no reason not to expect that to happen again. The Reddit crowd helped the situation recently by attacking the shorts in the futures market. Unfortunately, they are dealing with the bullion banks on the other side, not some hedge fund, so it's a little bit more difficult, but they learn quickly, very smart crowd. They started buying physical, and if you try to buy physical right now, I mean, if you can get it, the premiums are sky-high. So, I think that silver will continue to outperform gold, but you will get short-term retracements. If you look at the gold/silver ratio right now, we've had a nice drop from 120 down to close to 60. And it's been a five-wave move down. I've been saying that I expect a bounce in that gold/silver ratio, and we may have already started, but once that bounce is done, silver is going to blow past gold again.

Craig: Yeah. No, I agree. And again, whether it's viewed as an industrial metal with all of the stimulus and infrastructure and everything else going on in the world, maybe a new commodity bull market whether it's viewed as a monetary metal and all of the investment demand, it certainly has an intriguing picture going forward this year. And so, going forward this year, David, I want to wrap up with this most recent article that you've written for Sprott Money. Again, just go to sprottmoney.com, and at the top of the page, there's a navigation bar where you can find all of the articles by their featured writers of which David and I are both considered. I always make sure I read David's, that's for sure, and I would encourage everybody to do that. In your latest, Dave, you're kind of discussing the environment for a bottom and a turn to this consolidation phase. Why don't we wrap this up by you kind of paraphrasing some of what you wrote there and what you expect not so much, you know, next week, but in the weeks and months ahead?

David: Yeah, basically, I went through the various factors that I use in my process that I've used for years and has been constructed based on looking at the peaks and troughs going back 15 to 20 years in gold and silver, and indeed, in all asset markets, and the crux of that process is when all of those tools, those datapoints, all points in the same direction, you can have a high degree of confidence that it's going to go in that direction. And right now, when you look at fundamentals into market analysis positioning, Elliott wave sentiment, technicals, even the manipulation, everything is starting to look very, very positive for gold and silver just as it did back in the second half of 2015 when I started buying. So, at the risk of repeating myself, you know, we are seeing a stimulus come through from Biden. You've seen the IMF call for more government spending. You've got Powell coming out and reiterating his whatever it takes comment.

You've got Yellen hinting about MMT, you've got the pending yield curve control coming, and then you've got sentiment has turned bearish in the market, positioning. The bullion banks have used these selloffs to reduce their shorts. We don't know if they've cleared them out, but they're certainly in a better position right now. The technicals, I posted a bunch of tweets showing that the RSIs and the MACDs that we're seeing right now either match or are below the March 20 lows in gold and silver. So, to say that is extreme oversold is putting it mildly. Across all of my indicators, everything is pointing north. Now, is it 100% guaranteed that we are going up? No. Nothing's 100% certain. But the probability, the odds are heavily favored towards a bottom here shortly. We've come down to $1,690, $1,685, we could see an overshoot to $1,650, but the upside from my perspective is a new high. So, you're talking about $2,100-plus, maybe $2,300-plus. So, you're squaring $50 or $40 of risk against potential upside of $400 to $500. That kind of trade is a no-brainer from my perspective.

Craig: Yeap. I agree. The hard part, and I've used this analogy quite a bit, David, I would imagine you agree with this, riding the bull market is like riding the actual bull in a rodeo. Man, that thing is going to buck and try to throw you every step of the way, and the only way you win is by making it to the bell.

David: Exactly. But I will say this, one of the reasons...this is why I harp on about sentiment so much, especially in the precious metal sector, if you go back and look at the peaks and troughs in the past, pick out the charts and look at the conditions back then from fundamental sentiment, technical analysis perspective and positioning of the COT data and you go back and look at that and what the conditions were and look for consistencies at each of those peaks and troughs, there'll be inverse, but there'll be consistent. Then you get a feel for what are the things to look for going forward that will show you that there's a peak or a trough about to hit. And the beauty of that process, it means that you can maintain objectivity when there's a whole bunch of noise around you and everybody's getting euphoric or depressed about what's going on in the markets. And I recommend everybody do that because that's what I've done and that process works extremely well.

Craig: Yeah. Well, all right, my Irish friend. We are almost to St. Patrick's Day, which this year is that next step FOMC meeting, so we may all need a few green beers by the time Powell is done talking on Wednesday the 17th. But that does note for everyone that spring is right around the corner and, of course, it's a perfect time for spring with the Sprott Money signature sale, more sale products sprouting up than ever before. The sale you've been waiting for is bigger and better, but it's only running from now until March 20th. And yes, we do have stock on hand in inventory. You can check out and order all of our gold, silver, and platinum specials on sprottmoney.com. But remember, you can always just simply pick up the phone and call as well, 888-861-0775. And lastly, if you enjoy these "Weekly Wrap-Up segments," the "Ask The Expert" monthly segment, or anything that we do here at Sprott Money, please be sure to like the channel that you're on, maybe share some comments, subscribe, all that kind of stuff. We'd very much appreciate that. That helps us to widen our broadcast network and get the word out about precious metals. Speaking of getting the word out about precious metals, my friend, David Brady does a fantastic job. Again, you can find him on Twitter at the Twitter handle GlobalProTrader. David, thank you so much for your time today. You did a great job sitting in for Eric.

David: Thanks very much, Craig. And last word, we're close to the bottom folks and the risk award is dramatically to the upside.

Craig: That's exactly the right way to look at it. And again, no investment in physical precious metal where you diversify yourself out of dollars is ever really a bad idea. It's always going to be beneficial going forward. And that's a great way to look at it too. David, thank you so much for your time.

David: Thanks again, Craig. Much appreciated, my friend.

Craig: And from all of us here at Sprott Money News and sprottmoney.com, thank you for listening and have a great weekend.