Latest Update & Allocations Post Re-visited

Note: This post should be read in the context of the blog entry immediately preceding it. To get the full picture of my views on the current market and a transparent view of my on-going development of this System, please read the first blog entry on this date and then read this post-mortem.

June 7th and 8th were significant downside days for both GLD and SLV. Erasing the recent gains in SLV and putting GLD down by about 3% in the latest cycle instead of flat as it had been up to June 6th. In the grand scheme of things, not huge moves but frustrating to watch having finally shown some strength in recent weeks after a rather long period of sideways corrections in both metals.

As indicated in the preceding post, the Allocation System was beginning to signal a possible shift but given the small gains at that point in time and outlook, I did not want to act "too early" and possibly create more trading activity than I would otherwise hope-for. In a system such as this, there will always be a constant tension between two methods or market approaches: On one end of the spectrum, this is mostly an intermediate and longer-term trend-following system. As such, it should not require frequent trades and portfolio changes by the investor (without diverging here into just what "frequent" means). At the other end of this theoretical spectrum, is more active market-timing and trading. Generating more frequent market signals and requiring more active trading from the investor.

In retrospect, June 7th may have been a good day to have declared a "First Silver Sell Signal" (earlier posts provide more details but generally speaking, such a signal would be to take profits in one-half of the SLV position). But given the market outlook and expected seasonal choppiness and volatility, I didn't think the gains as of June 6th merited incurring trades attempting to lock-in the minor advantage. A tough decision to make.

The coming trading days will likely be just as tough or more so. Some current signals could indeed be interpreted to indicate taking profits and becoming much more conservative. While others indicate we are very near an intermediate bottom in the market and that patiently riding-through some short-term volatility will likely be rewarded with a solid uptrend to follow. From a long-term bull market perspective, both Gold and Silver are down at price levels of major support. So selling would seem premature. However, if both metals can't hold at such support levels, then the correction may become more severe calling-for sales to protect longer-term profits.

This isn't all that unexpected given the massive gyrations in all investment markets right now. The past two trading days--June 7th and 8th--saw large price swings in U.S. and global stock markets and the prime mover in the markets has been a major trend-reversal in long term U.S. interest rates. U.S. Treasuries blasted-through the 5% level (falling bond values) and there is significant bond portfolio adjustment taking-place in response to the difficulties in the U.S. Mortgage Market. Short rates are not increasing at the pace of long rates or they are even showing declines. The Yield Curve is becoming less inverted. And risk spreads between Sovereign debts and private debt (Corporates and Mortgages) are increasing. The results of markets "priced for perfection" are finally, apparently, being reaped. Given the massive size of the Global Bond Markets, when such large changes take-place, the ripples move through all other markets. Equities, Commodities, Real Estate, you name 'em. Normally during such volatile markets one would see intermediate to long-term U.S. Treasuries to rally on the reflexive "flight to quality" but as the reader should know, my outlook is not that U.S. debt instruments reflect their traditional "quality". But given enormous global liquidity and complacency about risks, during periods of only slightly rising fears or lack of clarity about markets, the ubiquitous response is for investors to decrease market bets and leverage across-the-board. Such selling pressure reaches the Precious Metals as well.

The question is whether it is a minor trend for now or the beginning of something larger and more persistant. It will likely only take trading days or weeks at most to know more surely. And then we'll position accordingly. Whether we can book gains or losses at that time will only be a secondary concern. However, it should be noted that these developments do nothing to change my long-term outlook that the precious metals are in Primary Uptrend Bull Markets. The same macro-economic trends in place that have rallied the Precious Metals for 6 to 7 years now are still in-place and will be--possibly even more so--even during some of what the broad markets may dish-up in the coming months. Overly expansionary Central Bank policies around the world these past years are the fundamental reason for the bull markets in the metals. Those same Central Banks the world-over have been tightening monetary policies firmly and consistently for some time now and that is what has finally caused the change of sentiment in the long term debt markets. But ultimately, to keep the massive credit bubble from deflating in a "financial accident" after all of the rate tightening, the Central Bankers will be required to once again inflate money supply. The same favourable dynamic for the precious metals exists. If one believes it doesn't, it frankly won't matter where we hide our investment dollars. Deflationary fall-out will wreak havoc across all sectors. Under such a low-likelihood (but very high risk) scenario, the two best places to 'hide' are likely in cash and precious metals. But cash would very likely be subject to eventual and sudden re-inflation through rapid debasement which would then favor Gold and Silver.

We are still where we want to be. And the market lessons of the coming week will likely be some of the most valuable to us in future cycles in the Precious Metals markets.

As Always, I must remind the reader that I am not an investment advisor or even a market professional. You should studiously perform your own research or consult other experts if you feel unable to make your own investing choices. There are numerous caveats and warnings one should be familiar with before investing in narrow market sectors like the Precious Metals and in very new investment vehicles like Physical Bullion "Backed" ETF's. I am simply using this forum as a place to objectively document my own work on my personal investing theories and strategies for my own portfolios. Everyone is responsible for themselves in the end.