Friday, June 20, 2014

Beware the Fury of a Patient Position

They say the third time's a charm - and if the narrowed range that has confined silver over the past two years is any indication, those participants patient enough should be rewarded handsomely for their extended stay on the long side of the field. Going into this month, silver was presenting a third iteration of the patterned reversal - with all of the positive momentum trappings that had defined the previous two. Adding fuel to the fire and despite the fact that silver had maintained a bid above last years low, those late to the short-side of the tracks or holding more dogmatic persuasions had built up a dangerously large short position almost 50% above last years record congregation. Meanwhile, the disinflationary macro backdrop that had filled the sails for the shorts over the past three years had shifted 180 degrees and was now blowing firmly out of the south. Preaching from the pulpit we would caution - beware the fury of a patient position. 

We would also caution anyone connecting the recent moves in precious metals directly to the latest geopolitical concerns in the Middle East, because the typical performance markers of those special situations are simply not present. Namely, the silver gold ratio has been trending higher - which is more indicative of a reflationary bid than fear. Typically, in a geopolitically driven move, gold will strongly outperform silver as a safe-haven reaction to those concerns. While the recent events have likely helped provide additional catalyst for the sector, silver and gold remain under the influence of a much broader narrative. To a large degree this is the mirror of the cycle, whereas, the killing of Osama Bin Laden in May of 2011 provided the prick that popped an overextended market.

Our market strategy is formed from a more proactive than reactive posture, because we typically take a longer-term view on markets and the spectrum of backdrop conditions they appear in the foreground to. This isn't to say that when conditions and information change we don't adapt - we do, but that we allow a wider berth of perspective when evaluating a position. This is one of the primary differences between how we weigh a market or asset and how a more classical technician reacts to price. The bottom line with respect to silver and the precious metals sector in general, is that conditions have only improved in the space over the past year - while their respective market structures has been trending to resolution. Anyone that has followed the broader narrative behind the sector and not just the daily machinations, namely the macro backdrop in long-term yields and the propellent currency markets upstream - would have come to a similar conclusion that the precious metals sector has remained very attractive.