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Precious Metals: Where Gold Is Headed, How to Trade Silver, and the Best Strategic Play Right Now


Plus, what the volatile movements in various commodity prices mean for investors.

This article was originally posted on the Buzz & Banter where subscribers can follow over 30 professional traders as they share their ideas in real time. Want access to the Buzz plus unlimited market commentary? Click here to learn more about MVPRO+.

Last week, Michael Sedacca and I talked with Nick Brooks, the Head of Research at ETF Securities (ETFS), about precious metals ETFs and ETPs, and the precious metals market.

Entering this year, Brooks viewed much of the investment community's sentiment on gold as bearish. He thinks that until now, some of that sentiment has worked its way through the market on a short-term basis.

Accordingly, Brooks believes that gold will continue to trade sideways unless geopolitical conflicts, like the tensions between Russia and Ukraine, erupt. Gold's price turned around at the beginning of the year, boosted by $322 million of inflows in February and over $500 million of inflows in March into gold ETPs. However, Brooks said that gold's price will not change significantly unless a change in real interest rates occurs. Interestingly, up to this point the direction of real interest rates has been very dependent upon Fed policy, which at its core is data-dependent. So as Nick pointed out, it is safe to say that the price of gold will be data-dependent as well.

Silver has dropped from headlines recently. Brooks said that it has maintained its role as a leveraged gold play due to gold's and silver's highly correlated prices. Gold's historic volatility has been 17%, and silver's historic volatility has been 34%, making the latter a 2x leveraged bet on the former. In recent years, silver's price has had a closer correlation to gold's price than normal, meaning that gold's price will be the primary catalyst for silver. While silver's fundamental value has a larger industrial element in its demand equation than gold at 50%, Brooks believes that global industrial growth will be average at best, making it an unlikely upside price catalyst.

Silver will only be good for short-term, tactical trades if gold continues to be range-bound. Brooks generally views gold as a long-term, strategic investment that provides a hedge against currency debasement, inflation, and geopolitical conflict; he views silver as tactical trading vehicle.

Brooks likes palladium as a long-term, strategic play. Analysts expect a large palladium deficit for 2014, and possible sanctions against Russia, the biggest producer, could increase the deficit. Brooks also sees larger future palladium demand as more Chinese consumers purchase automobiles and as the US economy improves.

Brooks views platinum as a good short-term, tactical trade due to the mine workers' strikes in South Africa, a large source of platinum. Plus, the platinum-palladium price ratio stands at its lowest level since mid-2002 at 1.

We also spoke with Brooks about the volatile movements in various commodity prices. Recently, ETFS has observed significant outflows from its coffee ETPs, which they read as investors taking profits. Also, Brooks thinks that lean hogs are a short from these levels due to extreme long positioning in CFTC futures. Lastly, he also views natural gas as a short as speculators still hold substantial long positions in futures, and notes that ETP investors have reduced their holdings into the recent rally.

Twitter: @ChrisWitrak
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