The #1 Driver of Metal Prices

03/16/2012 10:20 am EST

Focus: COMMODITIES

Chris Kacher

Managing Director and Chief Investment Strategist, MoKa Investors LLC Co-Founder of VirtueOfSelfishInvesting.com

Chris Kacher discusses key drivers of gold and silver prices and how he combines fundamental and technical analysis to find good trades in both of these popular commodities.

We’re talking about trading metals with Chris Kacher today. So, Chris, talk about your ideas on gold and silver and where we’re at here.

Well, gold has been in an 11-year uptrend now that began in 2001. Because of quantitative easing around the world, there are probably very few signs at this point that this uptrend is going to stop anytime soon.

Now, gold and silver are in basing patterns. They had huge run-ups earlier in 2011. We did very well pyramiding into those positions and then selling out very close to the top. Now we’re looking for a second potential to pyramid into these metals.

We trade the gold and silver ETFs, including the SPDR Gold Trust (GLD), iShares Silver Trust (SLV), plus the 2x ETF equivalents, and there are many other tailwinds with these precious metals, but the main one really is quantitative easing.

You have central banks around the world printing money like it’s going out of style, so hard assets tend to do very well as you continue to print money and currencies continue to devalue.

As I’m fond of saying, it’s a race to zero between the dollar, the euro, and the British pound, as all three entities are printing money en masse.

So it sounds like fundamentals are what you really look at with these metals. Are there technical reasons to support this as well?

Yes, well, we always apply a hybrid strategy. So even though the fundamentals are intact, we might not take a position without a technical set-up, and as a gold or silver ETF moves higher, we will add to the position, pyramiding every time it proves itself on a price basis, so we’re always averaging up.

That has done very well for us earlier in 2011. It did well for us for part of 2010, but we’re not shy about cutting the position if it doesn’t work out, or taking profits.

We use the ten-day moving average with some of these ETFs if they show that they obey the ten-day for an extended period, and sometimes, we’ll use the 50-day if we have a longer-term hold on the position.

We’re not looking to hold gold out to years, even though it’s done very well over the years, but we’re looking for the fat part of the curve.

In other words, the breakout point and then the trending period, and we’re trying to capture that trending period and then exit the position. We then can redeploy that money into other vehicles such as stock and the other ETFs that my timing model tracks.

Alright, so what would you see that would tell you that maybe it would be a top—at least short term—for gold or silver? Anything fundamentally or technically that would say it is time to sell and maybe even go short?

Well, there is the issue of the debt problem, and as the markets come off, a lot of these funds have to unwind positions to meet margin requirements sometimes in gold, and therefore, it puts pressure on the price of gold and silver.

Silver tends to track gold. It tends to be two to four times as volatile as gold, but they tend to lockstep more or less.

So we use GLD as a tracking device. If GLD starts to sell off because of this pressured selling, we will exit the position, and we will actually exit our silver position as well…they’re connected.

These hedge funds and banks that have to sell their gold because of margin pressures, and, if so, it might put so much selling pressure on gold and silver that we will be forced out of the position. Then we’ll wait for the dust to settle and we’ll retool and get back in at an appropriate buy point.

Because they’re so highly correlated, is there ever an opportunity where silver might take off before gold and you’ll have a chance to get into gold to take advantage of that? So one acting as a leading indicator for the other?

Yeah, I mean, they move roughly equivalent. Sometimes gold will get ahead of silver, and vice versa, but we use GLD as the beacon. That is the flagship in terms of the price of gold and where it’s headed.

A good example is even if silver doesn’t look ready on the chart, but gold is setting up and starting to move higher, it will drag silver up with it, and in the process of dragging silver up, silver tends to move eventually a lot faster than gold.

So it will get dragged up, it will get set up, and then it will potentially issue a very strong buy point, at which time we will act on the position.

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