Why The Gold And Silver Selloff Is Fooling a Lot of Investors

Precious Metals & Macroeconomic Update - January 30, 2024 (CPM Group)

Key Concepts:

• Short-Term vs. Long-Term Trends: The distinction between temporary market fluctuations and sustained directional movements, with the assertion that short-term trends can last 3-5 years.
• Open Interest: The total number of outstanding futures contracts, used as an indicator of market liquidity and potential price movements.
• Delivery Notices: Formal requests for physical delivery of a commodity underlying a futures contract.
• Bid-to-Cover Ratio: A measure of demand for US Treasury auctions, indicating investor appetite for US debt.
• Secular Bull Market: A long-term upward trend in a market, punctuated by cyclical corrections.
• Profit Taking: The act of selling assets to realize gains after a period of price appreciation.

I. Market Overview & Recent Volatility

Jeffrey Christian of CPM Group delivered this update on January 30th, 2024, noting significant price swings in precious and base metals. Gold reached a record intraday high of $2,586.20 for the February ComX contract before falling to $2,4932.50, representing a $500-$600 decline. Similar declines were observed in silver, copper, platinum, palladium, and aluminum. CPM Group attributes this drop to short-term profit-taking following a five-month (and five-year) bullish trend, maintaining a positive long-term outlook. The speaker emphasized the importance of understanding that short-term trends can persist for 3-5 years.

II. Historical Context: Time Matters

Christian highlighted historical precedents to illustrate the potential duration of market phases.

• 1980-1997 Gold Range: Gold traded between $320 and $380 for nearly two decades. Despite opportunities for profit within this range, predicting its end was crucial. When prices fell below $300 in 1997, CPM Group predicted unsustainability, but acknowledged a potential 3-5 year period of lower prices – which ultimately lasted until 2002. A brief spike to $340 occurred in 1998/1999 due to tightness in October ComX deliveries.
• 2012 Commodity Sell-Off: In January 2012, CPM Group recommended selling commodities, anticipating a 3-5 year cyclical decline within a larger secular bull market. Prices bottomed in 2016 and resumed their upward trajectory in 2019.

III. Current Market Factors & Short-Term Outlook

Several factors contributed to the recent market correction:

• Government Shutdown Averted: While a shutdown was avoided, Christian expressed concern that addressing underlying issues was delayed.
• Federal Reserve Chairmanship: President Trump’s consideration of Kevin Walsh (described as a former respected economist now aligned with Trump) as a replacement for Jerome Powell was initially viewed negatively, but ultimately less concerning than the previously touted candidate, Hassert, who was deemed “uncredible.” The Trump administration is backing away from more extreme positions.
• Political Backpedaling: Trump is distancing himself from controversial actions and figures, signaling a shift in strategy.
• Dollar Fluctuations: The dollar had fallen 2% from January 18th but experienced a slight rebound following the government shutdown resolution and Walsh nomination.
• ComX February Open Interest: Open interest in the February gold contract plummeted from 14 million ounces to 4.2 million ounces as shorts covered positions and rolled them into April and June contracts. This rapid shift contributed to the price surge and subsequent correction. 2 million ounces of delivery notices were issued on the first delivery notice day.
• Short-Term Profit Taking: Momentum traders who drove the recent price increases are now taking profits.

CPM Group anticipates a potential price rebound next week, with strength expected in the first quarter, followed by a plateau or slight weakening in the second and third quarters.

IV. Precious & Base Metal Specifics

• Gold: Despite the recent decline, CPM Group believes a fall to $3,900 or even $3,500 could still be consistent with an overall bullish trend.
• Silver: Silver reached a high of $1217.78 before falling to $90.33. A decline to $46 or $36 would still align with a short-term bull market. ETF investors sold 18 million ounces in the first three weeks of January and likely continued selling today.
• Platinum & Palladium: Both metals reached record highs before correcting. Platinum could fall to $1,800 and Palladium to $1,350 while remaining in a bull market.
• Refinery Backlogs: Refineries are experiencing backlogs in processing investment demand for 1oz, 10oz, 100oz, and kilo-sized bars.

V. Macroeconomic Considerations: US Treasury Demand

Christian addressed concerns about declining foreign demand for US Treasuries, presenting the following points:

• Continued Foreign Demand: Foreigners continue to buy US Treasuries, despite some shifts in individual countries’ holdings (e.g., India).
• Domestic Demand: 55% of US Treasuries are held by domestic investors (institutions and individuals).
• Offshore Holdings by US Investors: Approximately 24% of Treasuries are held offshore, but a significant portion of this is by US investors seeking tax advantages and a dollar hedge. Estimates suggest 30% or more of this 24% is actually US-owned.
• Federal Reserve Backstop: The Federal Reserve owns 13% of outstanding Treasuries and can intervene to support demand if necessary. The Fed has the capacity to purchase trillions of dollars in Treasuries.

VI. Geopolitical Risks & Long-Term Drivers

Despite short-term corrections, long-term bullish drivers remain in place, particularly geopolitical risks. The deployment of two US aircraft battle groups to the Arabian Sea, coupled with escalating rhetoric towards Iran, is driving investment demand for safe-haven assets like gold and silver, especially in the Middle East. The speaker referenced Trump’s past actions (Venezuela, Minnesota) as further justification for heightened risk perception.

VII. Resources & Further Information

CPM Group offers several resources for investors:

• Gold & Silver Renaissance 25 Years On Report: Available on their website.
• 2026 Gold, Silver, Platinum Yearbooks: Available for pre-order.
• Precious Metals Advisory & Base Metals Advisory Reports: Subscription-based services.
• Retail Investor Pro Program: A range of information services.
• Contact Information: [email protected]

Conclusion:

CPM Group views the recent market correction as a temporary profit-taking event within a larger, sustained bullish trend in precious and base metals. While acknowledging short-term volatility, they emphasize the importance of historical context, macroeconomic factors, and geopolitical risks in maintaining a long-term positive outlook. The firm highlights the resilience of US Treasury demand and the continued role of safe-haven assets in a turbulent global environment.