Summer Volatility in Gold Prices
Monday, 7/15/2013 22:39
Volatility in gold prices and other assets typically eases off in summer...
PHILIP SILVERMAN launched his alternative asset management firm in 2006, and specializes in managed futures products.
Here he speaks with Hard Assets Investor about the outlook for gold prices.
Hard Assets Investor: A lot of what you guys at P.Silverman & Co. do is based on volatility. We just went through a pretty volatile period recently. How does it look going into the summer?
Philip Silverman: Historically it's been a quiet period. The past couple of years, summers had a lot of action with the government budget thing, and then the EU. But we saw that big move down in the markets. The volatility spiked significantly. But now it's been steadily coming down the last week and a half.
Volume is low in the markets, the equity markets are moving straight up. And like I said, volatility is coming back down. I'm a bit surprised how quickly it's come down. Everyone's kind of moved away from the whole paper thing. I think a lot of that stems from the fact that the stock market is viewed as the best possible alternative. Not necessarily a great place to invest, but what's better? Where else do you go right now?
The rest of the world is struggling much worse than we are in the US. Part of the sell-off that came around the Bernanke time was also a big focus on China. We were seeing a lot of worries about a financial crisis in China. They were trying to clamp down on the shadow banking system. And now they kind of loosened up their rhetoric a little bit. They want to have a controlled tightening.
HAI: How about commodities? Maybe with the exception of oil; it's also kind of quiet. But in gold prices, big sell-off. Grains, other commodities have really come down. What do you see there?
Philip Silverman: The whole inflation trade has flipped. People are now worried about deflation. That's where we've seen, especially in gold prices and silver markets, that everyone has kind of run the other way. It's happened very quickly. Because the late entrants into the gold market – remember, we're up to 13 years in gold – those people who came in at the end are fund managers that can't sit on a position, a losing position, especially when the equity markets are rallying so hard. So they need to get out of it, quick. And the general idea, the worry about deflation rather than inflation, has moved everyone outside of those commodities.
Oil is its own beast. The Middle East, this whole Egypt situation is not going to go away easily. So we've been staying a little bit out of oil because it's really tough to call that. But I don't see any reason why Egypt is going to be resolved peacefully.
HAI: It looks like it can become another Somalia without a government.
Philip Silverman: The Muslim Brotherhood is not going to walk away easily. It's going to be a fight over there. So oil is doing its own thing. As we talked before, gold is a tough place to be right now. I don't think we're going to see any significant rebound in gold prices.
But by the same respect, it's come down so much I would be very careful trying to short it. Because markets don't move in one direction. And the snapbacks could be very, very fierce. Gold could be a good investment if you're still worried about inflation in the future – and there's a chance of that.
HAI: You want to be buying on these pullbacks – you have to be patient.
Philip Silverman: I think patience is the way you want to play
gold prices right now. I would say there's no need to be a hero. There are other places that you can move around.
And then the other real interesting thing are the credit markets, the Treasury bonds. This move in them has really spooked a lot of people. We've been talking to clients who are seeing their statements, and they've never seen their bond allocation lose money. And they're just in shock. So I think that's going to have deep reverberations for the entire asset allocation across the space of the market.
HAI: Do you see interest rates going much higher than where they are right now? If we hit the upper end of rates on the 10-year Treasury bond, we'll probably see it pulled back down again.
Philip Silverman: I would agree. I was surprised rates got as high as they did. I thought they would kind of settle more near 2.5%. But I think there were so many people that were kind of thinking the same thing, it overshot. But it will be interesting to see the path that they take because they definitely have a major effect on the global view of things.
HAI: We had a lot of people claiming we were going to get even hyperinflation, like a Zimbabwe. And it took a while for that perception to kind of turn around. But that's in fact what's happening right now, right?
Philip Silverman: Yes, I think people didn't realize the mechanism, the transmission of the stimulus. It went to the banks. They were able to get low funds. But it was not getting into the real economy.
HAI: It sat there in the banking system?
Philip Silverman: The velocity of money was not picking up; people were still underemployed. It wasn't an inflation situation. Now could we see inflation at some point in the latter part of the decade? Possibly. We'll see what happens then. But right now there does not seem to be any fear of inflation. Maybe on Main Street, seeing their gas prices go up.
I do think there's a potential that we see the sell-off in commodities give you an excellent opportunity to add to that allocation. But like we said, patience is one of the most important things when you're looking at long-term investing. Because these things do cycle, and you get an opportunity to get in at good prices. Like everyone saw gold come down a little bit and they jumped in, oh, it's going to go back up. Then it went down again. And there's a whole new group of people that came in and said, oh, now it's a deal. Be patient.
HAI: Patience is rewarded.
Philip Silverman: Absolutely.
Email us