I love gold and silver. I love the fact that I can hold it in my hand. I love that it can’t be printed. I love the fact that I can show it to my children and see their faces light up when they see a beautiful coin.
With gold down over 40% from its high and silver down 65%, I’m itching to buy.
But I love my capital and my sanity even more … and so I put my beliefs and my emotions aside and I look at the numbers.
And the numbers for gold and silver don’t look good.
First, let’s take a look at how the SSI suite of indicators has performed on gold and silver for the past 15 years …
Here’s a chart of cash prices for gold from the turn of the century through today. It shows seven instances of Re-Entry Rules entries (where each red line segment begins) and Smart Trailing Stop exits (where each red line segment stops). The blue line shows the Smart Moving Average for cash gold. The Smart Moving Average is the second part of the Re-Entry Rule strategy.
I know that the details are a little hard to make out but I’ve put all the individual entries and exits in a table below.
Overall, gold has triggered seven Re-Entry Rule / Smart Trailing Stop trades in the past 15 years. There have been 5 winners with an average gain of 30.5%. There have been 2 losing trades with an average loss of 12.3%.
All in all, not bad performance. While it didn’t beat buy and hold over the same time period, it did perform well and did so with well-defined and strictly limited risk. In fact, it did so with less overall risk. (For those of you that follow this kind of thing, the Sharpe Ratio on my system was 2.33 vs. 1.77 for buy and hold. A higher Sharpe ratio means that you earned more for the risks you took.)
Zooming in on the most recent 3 years of the above chart, we can see that gold is nowhere near triggering a Re-Entry Rule as of today.
The Smart Moving Average on gold is decidedly trending down – even accelerating down. In order for gold to trigger a Re-Entry Rule, this trend will have to turn positive AND gold will need to bounce at least 12.5% off its low.
Why 12.5%? That’s the current VQ% on gold. In order to trigger a Re-Entry Rule we have to see a bounce in our direction that is greater than normal volatility range of gold and we need the trend to be our friend.
A back of the envelope guesstimate is that we would need to see gold move back to the 1300 – 1400 range from here before it would trigger a Re-Entry Rule.
How about silver? It’s the same story, I’m afraid.
Silver has also seen 7 entries and exits over the same time period with 4 winners averaging 59.6% each and 3 losers averaging just 14% each. Our system also did much better on a risk adjusted basis (Sharpe ratio = 1.94) than buy and hold (Sharpe ratio = 1.12) over the same period.
Zooming in on the past 3 years of silver action, we see that, like gold, the Smart Moving Average is encouraging us to stand aside.
In order for a Re-Entry Rule to be triggered on silver, this trend will have to turn up and silver will have to bounce at least 20.6% (the current VQ% on silver) off of its low. The recent low in cash silver was about $14.50. A bounce of 20.6% from there would put us up around the $17.50 area.
But remember, we need more than just a strong bounce to trigger a Re-Entry Rule. We need the trend to turn in our favor as well.
Just seeing a strong bounce isn’t enough. For example, silver bounced over 20% from July to September in 2013 but the Smart Moving Average never turned up.
In fact, after looking everything over, the best opportunity that I see is a setup to sell silver short.
This chart shows the Smart Trailing Stop and Low Risk Zone boundaries for a short-sale of Silver. It shows that if silver rises above $16, it will be entering the Low Risk Zone for selling silver short. In fact it has entered this Low Risk Zone three times since 2014 and each time it has proven to be a good opportunity to sell silver short.
It’s pretty sobering when you dive into the data full of anticipation for a great buying opportunity and you come away thinking that it might actually be time to go short.
The single most important thing that all of our new indicators have done for me these past few years has been to keep me out of trades that I REALLY wanted to make.
I’ve wanted to buy gold and silver. I’ve wanted to buy resource stocks. I’ve wanted to get out of the stock market and even sell it short. My indicators have said “NO!” at every turn.
For now, I’ll have to satisfy my gold bug itch by buying a beautiful coin or two and taking them home to share with the children. But I’m definitely not backing up the truck.
To the protection of your capital,
CEO, Tradesmith
