“That’s life,
That’s what all the people say,
You’re riding high in April, shot down in May”
When Frank Sinatra sang this in 1966, he probably wasn’t talking about investing in markets, but after yesterday’s sell off in precious metals it certainly resonates.
Let’s get the bad news out of the way first. Yesterday’s fall in gold and silver prices was the highest in 12 years. Spot gold dropped 5.29% and spot silver fell 7.03%. It is difficult to know exactly what sparked the sell off, but it is likely to be a combination of profit taking, a bit too much froth in the market, and of course, commodities reminding us that they can be super volatile when they want to be.
Now the good news…
- Even after these falls gold and silver prices are still both up over 50% year to date
- When any asset rises very quickly, as precious metals have recently, corrections are not just inevitable but also healthy for a longer bull run.
- Prices had become ‘overbought’ in the short term, but precious metal prices are still in an upward trend.
- During the last huge gold bull market of the 2000s, which saw gains of over 630%, there were eleven occasions along the way when gold prices corrected by 10% or more.
- The underlying fundamentals behind this bull market have not gone away. Global debt, dollar debasement, geopolitical concerns, sticky inflation are all still genuine worries for investors.
- Gold, silver, and the mining companies are still structurally under-owned in investors’ portfolios
To that last point (‘finally, he gets to the chart of the week’ I hear you cry) Given how well precious metal miners have performed this year you would expect there to have been a groundswell of sentiment and capital towards the sector. But as you can see from the chart, over the long term the mining sector has consistently fallen out of favour to other sectors such as technology and financial services, and is now at the lowest weighting in over 100 years. Of this 1% about half is precious metals and half is companies mining for industrial metals. It takes time to discover and mine for commodities and this under investment in the sector, combined with the substantial future requirement for electricity created by the growth of demand for data centres, AI, electric vehicles etc, will inevitably push up commodity prices, as we previously wrote about in our commodity supercycle article.
After such strong performance in precious metals over the last two months, we took the opportunity to take some profits at the back end of last week and rebalanced the portfolios. We still maintain our positions in precious metals, but trimming these positions seemed like a sensible move. Rightly so as it turned out.
Drop us a line if you would like to know more, but I will let Frank sing out this update….
“Each time I find myself, flat on my face
I pick myself up and get back in the race”
Stay safe out there
