Precious metals investors would like gold and silver to trade based on long-term fundamentals and make their buy or sell decisions based on logic or reason that is within the realm of sanity. Unfortunately, in the near term, reality is likely to be quite different. Forget fundamentals and sanity, gold and silver in the near term will trade based on a rare explosive mixture.
The rare explosive mixture consists of weak hands on the long side as well as weak hands on the short side. It is common for weak hands to be the deciding factor on the margin either on the long side or the short side, but not on both sides.
In my 30 years in the markets, I have rarely seen situations where the controlling factors both on the long and short side are weak hands at the same time. This mixture is explosive and treacherous, it is unanalyzable with any degree of confidence, and can lead to artificially low or high prices.
In the case of precious metals, our models have a clear positive view in the very long-term, therefore any artificially low price that results from this mixture may turn out to be a generational buying opportunity. On the other hand, any artificially high price will be a short to mid-term trading opportunity from the short-side.
Let us first understand weak and strong hands. Weak hands are the investors without strong conviction or without the ability to withstand large draw downs. Strong hands are the investors with both a conviction and an ability to withstand large draw downs.
An example of a strong hand is the central bank of a country with current account surplus and low sovereign debt. In economics, current account is simply the difference between imports and exports.
Another example of strong hands is long-term gold bugs. Imagine a gold bug who has been steadily accumulating gold for the last 30 years, has an average buy price of $500, and has a conviction as well as means to never sell…. Read more at Kitco
