Sunday, May 15, 2011

Bullion Baron Heads for the Bunker

Over the past two months I have put up a couple of posts that highlight the risks we face as a consequence of the Fed discontinuing its QE program (even temporarily, which I believe will be the case, printing will be back in one form or another).

The way I see it the Fed's actions have likely been directly responsible for the risk trade continuing as long as it has. With the end of the Fed's QE program approaching fast I think it's worthwhile examining your exposure to assets that may be affected, which includes precious metals (particularly Silver).

See this post from early March
where I discuss a potential scenario if the Fed stops/pauses the QE program (which infact has been reasonably accurate so far, price target for Oil was a little high) and this follow up toward the end of April where I look at the correlation between the growth of commodities and the Fed's monetary base.

In both I talk about the actions I will be taking:
March: I am considering reducing my exposure to junior Gold and Silver mining stocks and will be looking at AUD Gold proxies such as PMGOLD and GOLD on the ASX to cover the above scenario.

Silver has had an extraordinary run and Gold has seen a modest rise over the last 6 months also. I will be looking to reduce my exposure to the metals (and related stocks) throughout this rally we are in. It will be the first time I significantly reduce exposure since I started heavy accumulation in 2008/2009.

With so many mixed signals it's hard to know what sort of outcome we might see post June when the Fed stops expanding their balance sheet. The old saying "Sell in May and go away" might just be a rule to adhere to this year and those familiar with the metals seasonal patterns will know that June through August can often be a slow period.
As indicated I have been reducing my exposure to Gold/Silver equities (reduced capital invested in stocks by around 75%) as there is risk they sell off in the event of a larger market collapse. Whether the precious metals decline to the same degree as other commodities and the markets I can’t say, but I have taken the conservative route to protect my capital incase. I don't often talk about my portfolio on the blog, but presently I am weighted around 25% in precious metal related stocks (two held), 25% physical and 50% cash (AUD).

At the start of 2011 I held 12 different precious metal stocks (number held peaked at around 15 in 2010). This number has slowly been reduced, many of those that I held that aren’t producing risk an unstable market for raising capital should they find the need to do so if the market is thrown into turmoil post June. I have held onto two precious metal stocks, CCU (Cobar Consolidated Resources, Silver) and CGT (Castlemaine Goldfields, Gold). Both of these companies should be capitlised sufficiently until profits from production turn them into self funding miners (first production: CGT aiming for September quarter and CCU by the end of the year).

I have also sold some of my physical Silver position into the rally. Over Easter (during the week before and after) I sold around 15%. It would have been nice to sell a little more, but I held off expecting we might see a short squeeze push the price higher than $50 short term where I would have offloaded another 15%. 

Ultimately I still see higher prices for Silver in the medium/long term, however after previous spikes of this magnitude we have seen severe corrections. followed by long boring consolidation periods The correction in April/May 2004 saw the price retrace to within 10% of the level seen in September 2003. The correction in May/June 2006 saw the price of Silver retrace to around the same level seen in November the year prior. The correction in March 2008 saw the price initially bottom around the high seen in November 2007, but later in 2008 got smashed further back to around the lows seen in the early 2006 correction! If we were to see this correction retrace back in a similar fashion to the last corrections then we may be looking at around $25-$28, but this rally was much stronger than previous years, so the correction might be similar. I wouldn't hold your breath for it, but we may still see Silver head back to test the breakout at around US$20-22. I say this not because I think it's highly likely, not to scare buyers out of the market, not because I think you should sell your Silver, but because I think we should be mentally prepared for a Silver correction that matches the intensity of the rally we've seen.

It's likely there will be a reduction in the number of posts on the blog as I take a step back, reassess the market activity post-QE2 and make a decision on where to direct my capital next. My suggestion would be to sign up using the email subscription box on the top right of the page to get notification of my posts.


Disclosure: Position held in Gold, Silver and mentioned stocks. Not investment advice. Do your own research.


  1. What are your thoughts on the fact that U.S debt ceiling is rapidly approaching (I believe the currently accepted view is that US will default on its debt by 2 August 2011 if the ceiling is not increased).

    There does not seem to be any method, short of extreme (and basically impossible) cost-cutting of government spending that could allow for any alternative other than raising that ceiling.

    Accordingly, it seems almost certain the debt ceiling will be increased, and as a consequence of which, U.S inflation will continue unabated.

    Once that is announced, the precious metals will again rally, so if anything, doesn't it make now a good time to buy?

  2. I think that congress will be forced to increase it.

    The increase of the debt ceiling has not had a noticeable (short term) affect on the price action of Gold in the past.

    I think if there is any announcement that will send the metals rocketing it will be that of QE3.

    I think it's likely we will see seasonal weakness in the metals through the middle of the year and with the end of QE2. Although for those in Australia that doesn't mean the price will be lower for us if the AUD falls against the USD as I detailed in the March post linked above.

    I don't see now as being a bad time to buy as long as you have a 12+ month outlook incase of further short term weakness.

  3. Good stuff BB.

    Since you are reducing precious metal posts/articles, I'd like to read more about your view on housing.

    You've probably noticed the recent data remains weak.

    Keep up the great work!

  4. Hey, nice blog. I read today that the house voted down an increase in the debt ceiling, currently 14.25 trillion. Cuts and austerity will only blow out the deficit in my opinion. QE3 is coming, maybe a selloff will make it palatable?

  5. Thanks Bryce. I agree that QE3 is still coming one way or another, as you say a crash may make it palatable and politically feasible.