CPM Market Commentary: Gold, Silver, and Runaway Trains |

CPM Makret Commentary: Gold, Silver, and Runaway Trains

On Monday 24 February CPM wrote: “Do not stand in front of a runaway train. Gold has risen more than $120 in five trading days.” Our view was that prices had risen too far too fast on too little of substance. It was based on the awakening financial market fears of the economic consequences of the coronavirus. We advised our short-term investor clients not to buy but to wait to sell. We said we thought prices would peak and drop. They did, starting that afternoon and continuing through today.

As of 1:00 p.m. EST Friday 28 February gold had dropped to $1,583.60, from its peak of $1,691.50 on Monday. Gold touched a low of $1,564 during trading Friday. Silver, platinum, palladium, petroleum, other metals, and agricultural commodities all fell sharply.

We will repeat what we said Monday, but on the return train: Do not stand in front of a runaway train. Runaway trains are dangerous regardless of which direction they are going. Our target for gold’s backing off was a range of $1,550 – $1,620, although we did not expect to see it this fast. If prices stabilize around $1,550 – $1,580, we would recommend buying gold on both short and long term objectives. Our Trade Recommendation from today, issued to relevant clients, is below as reference.

All financial markets remain volatile. There is no certainty of the course of the coronavirus, the efforts to contain it, or the economic consequences of the epidemic. It is likely that over the next two to three months (a) the virus may be contained or go into seasonal remission, (b) corporations and governments will find a way to work around it even if it does not go into remission, (c) economic activity and financial markets will recover and stabilize. While these trends are emerging, markets are likely to remain volatile.

Gold and silver are portfolio diversifiers. That means they have low correlation to stocks, bonds, and currencies. It does not mean that they have a high negative correlation. Thus gold and silver initially rose when stocks plunged on the coronavirus epiphany by financial market participants, but fell back and continued to decline over the past week even as stocks fell further. Gold’s long-term correlation with stocks since 1968 is 4%. Its correlation to bonds is 0%. That’s a good portfolio diversifier.

CPM Trade Recommendation 28 February 2020
Time Stamp
Prices as of 1:00 p.m. EST (18h00 GMT) 28 February 2020 $1,583.60 (Basis the April 2020 Comex Contract).
Direction: Stand Aside, Wait to Buy
Target Price / Range: $1,550 – $1,620
Timeframe: 02-03-2020 to 06-03-2020
Note: Discretion should be allowed at +/- $0.50 from the target.