Monday , 17 June 2024

Risk-Reward Ratio For Gold & Silver Skewed to the Upside – Here’s Why

…While gold and silver both have rebounded off the recent lows, the risk of a lower low has diminished, but it is certainly not zero. However, I believe the risk to the downside pales in comparison to the pending rally ahead.

So says David Brady in an article which has been edited and severely abridged for posting on  Brady goes on to say:

The Bullish Case for Gold

  • …Sentiment is rising from its most bearish levels since it bottomed in November. A bullish signal.
  • Positioning shows that the so-called dumb money, the hedge funds, are racing to get short at the fastest pace since March 2020. We all know what happened next back then. Another bullish signal. At the same time, the banks, or the smart money, are slashing their shorts in order to get long.
  • The 10-Year Bond Yield may have already peaked, and the DXY and USD/JPY along with it. If true, and it remains to be seen, this is also extremely bullish for gold and silver.
  • …A new COVID variant is coming this fall and the last time that occurred, the government ditched their anti-inflation policy by ramping up QE into the trillions and slashing interest rates and gold and silver soared! Are the metals anticipating a similar scenario once again?…
  • BRICS…are considering a new BRICS currency, backed by gold and other commodities, which would rival the dollar’s status as the global reserve currency. The petrodollar is also on shaky ground, all of which is likely to benefit gold and silver.

In summary, there are plenty of reasons to believe that the monetary metals are going higher from here. The first step to confirming that would be the break of the recent high at 2011 and, most importantly, the record high at 2089.

The Bearish Case for Gold

…The Fed is meeting Friday… [and if] they are hawkish, we could see gold and silver head back down to lower lows. If dovish, then up the metals go.

Silver’s Parallel Journey

All of the same factors that affect gold obviously impact silver too, so I won’t repeat them. Silver has rebounded extremely well from its lows, but it is unlikely to be able to soar to new heights if gold is heading in the opposite direction. However, there is one big difference between the two that suggests silver will outperform gold going forward, positioning.

  • The funds are net SHORT and, while they could get even more short, this strongly suggests that the low has been struck or we have one more lower low to come, worst case ~21 IMHO.
  • Meanwhile, the banks are net LONG. and again, while the banks could even increase their net long position, it is a very bullish indicator for silver.

GDX Influenced by Performance of Gold and Stocks

…While the miners track the metals, they could underperform the metals in the short term if we get renewed downside in stocks in the short term. The S&P could still fall further to my target of ~4200. From my perspective, this just makes them cheaper to buy, because when the metals rally, the miners will outperform them dramatically in my opinion, especially some individual miners.

Conclusion: Risk-Reward Skewed to the Upside in Precious Metals

The balance of data in hand suggests the risk-reward is skewed to the upside, but the risk of a lower low remains in both the metals and miners, especially if 1900 in gold is broken. Jackson Hole could be the trigger. That said, beyond the very short term:

  • the upside from here is $750 to $1050 in gold compared to a risk of $100 to $170 on the downside;
  • the upside for silver, is a potential reward of $25 to $40 compared to a risk of $3 to the downside.
  • Both are a no-brainer from my perspective!