*We only trade the S&P 500 using our quantitative models. Our sister fund is very different. They trade silver’s medium-long term waves via a discretionary approach. (Silver and gold move in tandem. Silver is merely the more volatile asset.)
Our sister fund was kind enough to let us share their thoughts about precious metals here on the blog.
They shifted from 100% cash to 100% long USLV (3x silver ETF) last Friday. Here’s why.
The big money is made by identifying bull markets and riding the massive bullish waves. Too many traders jump in and out of the market, which is why they’ll never become insanely rich.
Here are 3 charts illustrating silver’s previous bull markets.
As you can see, silver’s bull markets are much rarer than the S&P’s bull markets. But when silver does experience a bull market, it SOARS like no other market. This is because silver is a relatively small market than can be easily pushed by speculators. When the fundamentals change and silver starts to rise, it SOARS. Since gold and silver move together, a silver bull market = a gold bull market.
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The beauty about trading silver is that you don’t always have to be in the market. You can sit on cash for years, and when the bull market arrives, 4-5x your money in just a few years. All you have to do is ride silver’s bull market from bottom to top.
Now imagine trading USLV (3x silver ETF) instead of trading SLV (1x silver ETF). In a bull market, USLV will go up at least 20x. Since silver’s bull markets are compressed, the mathematics of ETF compounding work in your favor. This is how millionaires and billionaires are made in just a few short years.
The coming bull market in gold and silver
Our colleagues in our sister fund believe that we are on the precipice of a massive bull market in gold and silver. That’s why they’ve shifted from 100% cash to 100% long USLV. If they are right, their portfolio will be up 20x, 30x, 40x, or maybe even 50x in just 2-3 years. It sounds crazy, but the 1978-1980 bull market, a 3x ETF like USLV would have gone up 70-80x!
Here’s why they think that a bull market has begun.
Commodities are making a massive bottom
From a long term perspective, gold and silver move in the same direction as commodities in general. Oil symbolizes commodities as an asset class. This means that if oil crashes like it did in 2014-2015, gold and silver will either crash or be flat. Gold/silver will not rise.
Our sister fund thinks that the major commodities have all completed a multi-year bottom.
Crude’s production cost is $37-$40 right now. Historically, production costs have been the low for oil prices.
Here’s copper. Copper represents industrial metals.
Here’s DBA (agriculture sector ETF).
So purely from a mean reversion perspective, our sister fund thinks that gold/silver and other commodities are about to make a massive rally. They think the massive rally will eventually turn into a massive bull market.
Gold and silver are the only assets to have gone down since 2009
It’s hard to ignore the trillions of dollars of Chinese money. The Chinese love to speculate in a herd. They buy/sell houses like candy at a candy store. This is part of the reason why the world has experienced bubbles in everything from real estate (NY, London, Singapore, Sydney) to Bitcoin since 2009.
*A lot of Bitcoin’s trading volume comes from Chinese speculators and their overseas proxies.
Bitcoin has little runway left, and real estate in major cities around the world are unlikely to experience the same kind of gains that they’ve experienced over the past few years. In speculation, the Chinese have a “hit and run” mentality. They’re looking for big and fast profits. In the average Chinese speculator’s thinking, “10% a year is chump change.” This is what happens when your nation’s economy has experienced rapid GDP growth for 20 consecutive years. People lose their minds.
So what is the one asset left that hasn’t been pushed through the roof and is still relatively cheap?
When an asset is cheap (i.e. gold/silver), it becomes easy to speculate. E.g. it’s easy for a “cheap” asset to rise 50%, while it’s harder for an “expensive” asset to rise 50%.
Our sister fund thinks that as China’s money moves away from speculating Bitcoin and global real estate, they’ll start to speculate gold/silver. And since gold/silver are relatively small markets, these assets will soar.
Getting the timing right
Knowing that commodities have made a massive bottom is not enough. In trading, timing is just as important as having the right market outlook. Our sister fund thinks that gold/silver will start their bull markets within the next few months (i.e. before 2017 is over).
Bull markets in commodities typically need a catalyst. This tends to be an event that marks the bottom of the bear market and precedes the first giant rally.
Our sister fund thinks that this catalyst will be a Chinese fiscal/monetary push in late-2017. After 5 years of internal political maneuvers, Chinese President Xi Jinping has finally gained complete political control in China. Based on our contacts in Beijing, President Xi will make a big effort to push the Chinese stock market/economy higher after the Communist party’s October 2017 congress.
Our sister fund thinks that this move will generate a new bull market in Chinese stocks and re-ignite China’s speculation fervor. When that happens, gold and silver will really enter into a bull market.
Here’s China’s SSE Index
*We do not agree or disagree with our sister fund’s views. We trade the S&P while they trade gold/silver.