Yesterday was a wild day in the world of precious metals, with gold and silver blasting to new all time highs before plunging sharply in the afternoon.
In its morning note, Waverly Advisors examines some of the mechanics of the day’s action, noting in particular the GLD-Gold stocks disconnect:
The extremely odd action in metals yesterday probably highlights how complex the equity-commodity link has become. GLD, of course, has become a major driver of Gold prices, with SLV taking a similar but lesser role in Silver. The activity in these ETFs, especially after the regular sessions for futures close, supports the argument that these products are well on their way to usurping the supremacy of the futures as a pricing instrument. In addition, we believe that equity investors, who traditionally would have traded baskets of Gold and Silver stocks based on moves in the underlying metals, are now trading GLD and SLV based on movements of metals and mining stocks, indeed, the broad market. Relationships in financial markets are never as simple as we would like to believe, but this web of Futures/ETF/Sector Stocks/Broad Market relationships is a new frontier in complexity. Welcome to the brave new world.
In practical “trader’s terms”, it boils down to this: These markets are certainly overextended by any measure, and, as such, are vulnerable to corrections. Because of the potential for new feedback loops, these corrections may be larger, sharper, and more irrational than most market participants expect. In short, expect the unexpected and do not be caught off guard. Though yesterday’s action could set off a larger pullback, we see nothing to challenge the integrity of the higher timeframe trend, and weakness in these markets is to be bought until further notice.