The title of this post is a nod to a satirical account on Twitter I follow who always Tweets about braking news. While I think the title is amusing (to me if no one else), the markets for gold and silver have broken. It's not like the metals are going to disappear but this sort of panic down is a broken market.
The broken market will repair itself and normalize tomorrow, or next week or some other time but this is the sort of event where people panic. Gold panicked higher Wednesday night and then panicked lower shortly after the stock market opened on Thursday. Silver has been on a similar journey and Bitcoin also seems to going along for part of the ride.
All the hype over the last few days or weeks about the debasement trade lifting gold and silver, even if not Bitcoin, and then...
Thursday was a big decline and then Friday literally broke records for the size of the declines.
Long time readers might recall what a bad idea I think enormous allocations to things like gold are and this event is exactly why. Where gold and silver are concerned this week, risk happened fast as Mark Yusko might say.
I have zero concern about gold and silver (and whatever else) sorting themselves out, crude oil was negative $50 after all, but who panic bought Wednesday and then panic sold at a big loss with far too big of a trade in relation to their account size? Realizing, there is no way to know when this ends, this has been a behavioral festival.
I mentioned last year that I started subadvising for a couple of other advisors (they outsource portfolio management to me). One of the advisor's client base came with a larger position in GLD than I would probably want but I took no action because the market had been orderly as it was moving higher. With the disorderly, parabolic move lately, a portion of his accounts were now at more than 10% in gold which I think is too much. I built out a trade Wednesday night to execute Thursday morning to take that portion of his client base down to 7% in GLD.
The share quantity is fuzzed out. I executed the trade a minute or three into the trading day. There have been a couple of other times over the years where there has been some sort of similar panic where it made sense to go the other way. I told the advisor, don't focus on the result because it was lucky, focus on the process. Selling into upside hysteria is going to be the right trade more often than not, regardless of what happens next.
My clients started at 2-3% of just their equity allocation in gold last February so they were up to 4-6% or so which is not a position sizes that concerns me even with the overlap in materials stocks and managed futures. I actually reduced materials by about 20% a couple of weeks ago so sized correctly, this event is in the realm of normal volatility. This is about a process that I think is repeatable.
Personally, I bought a few shares of the iShares Silver ETF at about $82 on the way down to $70 before closing at $75. The trade amounts to catching a falling knife so I didn't step in for clients, it doesn't seem like a good fit that way but it is the same trade as selling upside hysteria, I bought a little bit of downside hysteria. Maybe silver will go to $50 and live there for a while or maybe it will go back to $90 or $100 quickly and then mellow out but it is down 30% in a couple of days and even if the result ends up being terrible, buying something that cannot go to zero after a 30% whoosh will work out more often than not.
There's no huge barrier to entry here for the psychology. I think most people can train themselves to trade against panic, regardless of the direction, in something they understand. I certainly wouldn't buy a lottery ticket biotech that I'd never heard of before cutting in half on an adverse FDA ruling for example.
Even if you are not buying this panic down, again it might turn out to be a terrible trade, if you can avoid panicking, that is far more important. Sized correctly, there is no reason to sell gold or silver into this decline.
The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.
No comments:
Post a Comment