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We haven’t written much about gold and silver recently, and that’s on me. I’ve been meaning to write pieces about precious metals on various days, but then something came up on each of them. Many investors and active traders clearly have been participating in the huge run-ups that each of those metals have experienced recently and today can’t be a pleasant one for those who have been chasing the rapid moves higher. As the chart below shows, gold futures have been on quite a tear over the past three months (and more), while silver futures went parabolic recently.
3-Months, Front-Month Futures in Gold (red/green daily candles), Silver (blue line)
Source: Interactive Brokers
Today’s significant declines in gold and silver (-5% and -7%, respectively, as I type this) do not necessarily puncture the bull market narratives behind those commodities, but they once again heir out the risks of chasing sharp upward moves, particularly those that become parabolic. We have written before about how unpredictable those moves can become, particularly because parabolic moves often indicate that some market participants are in real pain. The problem is that when their malady is cured, at least temporarily, the main impetus for the parabola is removed, and those who chased it are left long without a natural buyer. That means that the supply/demand calculus changes abruptly and with no warnings.
There were numerous news reports about a global short squeeze in silver, but when it became clear that the supply now met the demand, the market dynamics reversed. Actually, we saw a bit of a sell-off in metals on Friday, but dip buyers stepped in yesterday as if on cue. This is where trading dynamics fall victim to larger considerations of supply and demand. This is where our admonition from last week comes into play:
It is very difficult to know if a wave of selling is part of the normal flow, a rogue wave, or a shift in the tides.
If you’ve been chasing the rapid rise in metals recently, ask yourself now if you can reasonably assess the relative probabilities of normal flow, rogue wave, or tidal shift in those markets. If you’re new to trading those markets, please recognize the difficulty of an accurate assessment.
Related: Why Every Dip Gets Bought—and Why That Won’t Always Work