So why, as the title of this post suggests, would I argue for the rally to continue? Below I lay out the various arguments I've read calling for a pullback and then provide my rebuttal. Take a read and see what you think.
Argument #1: The massive net short position by the Comex bullion banks and the net long position of the hedge funds are at record highs.
The logic behind this argument is that Bullion Banks are the "smart money" and Hedge Funds are the "dumb money." Bullion banks are considered the smart money because they have an inside track on the precious metals market as they are the swap dealers and therefore the most "connected" with institutional supply and demand. It's important to know that bullion banks tend to take equal-but-opposite positions of the hedge funds. So, for example, if hedge funds are mildly net bearish, then bullion banks tend to be mildly net bullish. Argument #1 is based on the fact that oftentimes extreme bullion bank positioning is a good indicator of future price movement in the metals. Since bullion banks are the "smart money," price tends to move according to their positioning. So right now, these banks have a massive short position in gold and silver. On Thursday and Friday alone, the Comex banks sold short over 50,000 gold contracts representing 5 million paper ounces of gold worth over $6 billion (!). A major reversal must be on the horizon, right?
My counter to this argument is that while Comex positioning tends to indicate future price movements, it by no means is guaranteed. First and foremost, all of the positioning data is based on the COT report, reported weekly by the participating banks. As Dave Kranzler put it the other day, "...the veracity of the COT data is predicated on the reliability of reports generated by the likes of JP Morgan, HSBC and Scotia. If these banks are providing bona fide, non-fraudulent Comex data reports, it would be the only area of their entire business for which they are not publishing corrupted financial information." He is, of course, referencing the myriad of price rigging scandals perpetrated by the big banks which include the most recent admission of gold and silver price manipulation by Deutsche Bank. So for starters, if you base trading decisions on the COT report, you're assuming the data is clean and honest. Secondly, as Kranzler goes on to explain, there are plenty of times throughout history where gold and silver moved against extreme bullion bank positioning. This would suggest that the "conventional wisdom" of trading alongside the bullion banks is not always the right move. I suggest you read his post (linked above) for the full analysis. Bottom line, to sell here based solely on the COT report ignores plenty of historical precedent to the contrary.
Argument #2: Mining stocks have run too far too fast.
Now this is an argument I would typically agree with. As I laid out at the beginning, mining indices are up 100% in just four months with some individual junior miners up more than 500%. After these kinds of gains I would usually expect some consolidation. After all, the strongest bull markets need to pause and build bases from which future gains are made.
While I'm not arguing that "this time is different," I will argue that there are plenty of gains still to come before any significant consolidation. Take the weekly chart of GDX for example:
Now, let's move on to Gold. First, I want to show the weekly chart:
I'm running out of time so I'll wrap it up here. I was also going to argue that the new Yuan-denominated gold fix was yet another bullish variable to consider, so if you're interested, you can read a nice analysis posted here.
The bottom line here folks is that now is not the time to get cute and wait for a 15-20% pullback because I don't think it's happening for the arguments laid out above. Gold and silver were so oversold for so long that the beach ball can no longer be held below the surface. The "no-brainer" trade of selling any and all precious metals rallies has now reversed, and all those levered short positions and pair trades have to be unwound. Will we see a correction again? Yes, absolutely, but I don't think it will happen until prices hit the levels I noted above. And even then, with all of the craziness we're seeing in the financial markets (QE, ZIRP, NIRP, etc), who knows how long or deep any consolidation will actually be.