Selling Gold and Silver Is the Buying Opportunity of the Decade – Bawden Capital

(Kitco News) – Gold and silver are seeing a slight recovery after Friday’s market rout, which ended their worst October performance since 2008.

Some investors have become frustrated with precious metals as prices have struggled in recent weeks, facing rising opportunity costs as central banks around the world try to rein in inflation. More recently, gold and silver have also been victims of a broader liquidity crunch, with stock markets seeing a significant decline last week.

However, one fund manager said last week’s sell-off, as well as any further corrections, could represent the buying opportunity of a lifetime.

“Silver is about 60% below its record high of $121.64, and gold is at a one-year low,” Jen Bawden, founder of Bawden Capital, said in her latest market commentary.
“Financial headlines are talking about a precious metals wipeout, and retail traders who bought the highest are capitulating in pure panic. To the untrained eye, this looks like a massacre.”

“For seasoned resource investors who understand global capital flows, paper market mechanics and margin shocks across multiple assets, this is NOT a crisis; it is exactly the liquidity air pocket we have been waiting for.”

Although the break below critical support levels last week was disappointing, Bawden said the move was not surprising, given the headwinds facing gold and silver.

She noted that even though the Federal Reserve left interest rates unchanged last week, markets still expect a rate hike in December. She pointed out that the threat of rising interest rates increases the opportunity cost of holding non-productive assets like gold and silver.

Looking at the immediate price action and technical damage inflicted on Friday, Bawden noted that the threat of rising interest rates also appears to be taking a toll on stock markets. The S&P 500 lost 2% heading into the weekend, its biggest decline since early June.

Bawden also noted that near-term volatility is fueled by broader geopolitical uncertainty and the global energy supply crisis resulting from the ongoing war in the Middle East.

“The biggest misconception circulating among commodity traders is: ‘If the Middle East is on fire and Brent crude is hovering above $113 a barrel, why are gold and silver falling?’ ” said Bawden.

She explained that disruptions in energy supplies are creating significant demand for US dollars, adding further pressure on precious metals.

“When conflict disrupts transit through the Strait of Hormuz and energy prices skyrocket, every major energy-importing country, from Japan and South Korea to Germany and India, faces an immediate terms-of-trade crisis. Because crude is priced and settled globally in U.S. dollars, oil exceeding $100 forces commercial importers to aggressively dump their national currencies on the open market to buy massive tranches of U.S. dollars just to keep their power grids running,” she said. The Kitco Global Index shows how much of gold’s current performance is driven by the dollar versus the gold market itself.)

Bawden added that the resulting demand for U.S. dollars supports the greenback, while rising energy prices fuel persistent inflationary pressures, raising the prospect of further monetary policy tightening and rising bond yields.

Bawden said all this uncertainty is finally coming to a head as the threat of rising interest rates looms over the broader economy and stock markets. She pointed out that rising bond yields reduce the present value of future corporate profits while making much-needed capital more expensive to borrow.

“When a tight tech and stock market cracks, it doesn’t fall on its own. This can trigger a sudden liquidity crunch in many markets. During a selloff, big funds don’t sell what they want to sell. They sell whatever is liquid and easy to sell,” she said. “Gold and silver are very easy to sell.”

Although significant technical damage was inflicted on gold and silver, Bawden said this weakness is consistent with previous liquidity-driven sell-offs.

“This is what happened in October 2008 and again in March 2020. Once the forced sales ended, gold and silver recovered and recovered strongly,” she said.

“In both crises, gold and silver fell sharply, as did stocks. After the collapse of Lehman Brothers in the fall of 2008, gold fell about 29% and silver more than 50% from their March 2008 highs. In March 2020, gold fell about 10% and silver about 35% in a matter of days.”

Bawden noted that both precious metals then experienced significant rebounds after the initial liquidity shocks faded.

“Once the forced sales ended, the metals rebounded quickly. After 2008, gold rose about 170% in August 2011 and silver soared to almost $50. After March 2020, gold gained about 39% to a new record high in August 2020, and silver jumped about 150%,” she said.

Although Bawden views the current selloff as a potential long-term buying opportunity, she cautioned that prices could fall further before the precious metals market hits a sustainable bottom. It said it had already placed limit orders to take advantage of further weakness, targeting discounts of between 20% and 30% on certain mining stocks.

At the same time, Bawden said physical demand in Asia could provide some underlying support for silver. She highlighted the divergence between silver prices in Shanghai and the West during Friday’s selloff, while acknowledging that China’s silver tax eliminates much of the apparent premium. It also expects Chinese demand for precious metals to remain an important long-term price support factor.

Bawden explained that short-term volatility has not changed his long-term outlook. She said the next decade would belong to hard assets like gold and silver, with investors increasingly pressured to protect their purchasing power in a world struggling with unsustainable sovereign debt.

“The sovereign debt mountain cannot survive indefinitely at high yields without affecting the banking sector and the real economy,” she said.

“Governments, businesses and consumers around the world are heavily indebted, and those debts become more expensive when interest rates remain high. If rates stay this high or rise for too long, it will put real pressure on banks and the economy as a whole.”

Bawden expects that growing debt pressures will eventually force central banks to reverse course and ease monetary policy, creating a more favorable environment for precious metals.

“When the breaking point reaches, central banks will be forced to ease policy, the wartime strength of the dollar will collapse, and global capital will flow into real, tangible assets,” she said.