Why Gold and Silver Are Falling

This is the third-longest such streak in the last two decades, according to Rocky White, senior analyst at Schaeffer's Investment Research.And until last Friday, the S&P 500 had gone 17 straight trading days without a 0.5% intraday move in either direction. That was the longest streak in 45 years.

But there are reasons to believe the calm may not last...

As we've discussed, September is the worst-performing month of the year for stocks. Every major U.S. index – including the S&P 500, the Dow Jones Industrial Average, the Nasdaq, and even the small-cap Russell 1000 and 2000 indexes – has posted negative average returns in September, according to the Stock Trader's Almanac. This is even the case in election years, which tend to have a bullish bias.

Meanwhile, as we noted in the August 17 Digest, plenty of potential catalysts could support a move lower in stocks...

Earnings are still poor. Financial data firm FactSet Research reports S&P 500 earnings fell 3.5% in the second quarter, with 91% of the index companies reporting so far. It's safe to say earnings fell again last quarter, marking the fifth straight quarter of declining earnings. This hasn't happened since 2009, at the end of the last financial crisis. But this time, it has happened while official figures say the economy is still growing.

Stocks aren't cheap. The S&P 500 is trading at more than 25 times earnings, which is well above its long-term average. And company insiders are selling at the fastest rate since last April, just before markets peaked in May, according to INK Research.

And it's looking increasingly likely that the Fed is preparing to raise interest rates again...

In a speech at its annual retreat in Jackson Hole, Wyoming on Friday, Fed Chair Janet Yellen noted the U.S. economy is "now nearing the Federal Reserve's goals of maximum employment and price stability," and said the case for another interest-rate increase has "strengthened" in recent months.

Yellen didn't indicate how soon the Fed could raise rates again, but futures markets are now pricing in close to a 50% chance of a rate increase in September, and a 65% chance of a hike by the end of the year.

The determining factor could be the August jobs report, which will be released this Friday. Several Fed officials, including Vice Chairman Stanley Fischer, have suggested that a strong jobs report would trigger some "serious discussion" about a September increase.

Again, so long as the rest of world's major economies hold interest rates at or below zero, we believe it's only a matter of time before the Fed is forced to join them. But we wouldn't rule out anything – including additional rate increases – in the near term.

Yellen wasn't the only central banker to make headlines at the Fed's meeting last week.

In a speech on Saturday, Bank of Japan Governor Haruhiko Kuroda indicated Japan has no intention of reversing its unprecedented easing programs. In fact, he said there is "ample space" for Japan to ease further – including increasing its quantitative-easing program and pushing rates even further into negative territory – and said he wouldn't hesitate to do so if necessary.

Finally, we note gold and silver have pulled back in recent weeks...

Gold has fallen a little more than 3% from its recent highs, and is sitting near a five-week low at $1,325 an ounce. Silver is down about 10% to an eight-week low below $19 an ounce. And gold miners – as tracked by the VanEck Vectors Gold Miners Fund (GDX) – have fallen about 15%.

We trust regular Digest readers aren't losing sleep about these declines. But we've received a handful of e-mails (see today's mailbag below) from folks who are worried and want to know why precious metals have been falling. So we'll quickly review our stance again today...

First, it's important to remember that no bull market goes straight up forever. As former Stansberry Research Editor-in-Chief Brian Hunt likes to say, markets are like sprinters. They can't run flat-out all the time. They need to take a "breather" from time to time.

Pullbacks and corrections are a natural and necessary part of every bull market. They allow sentiment to reset and they set the stage for the next leg up.

Gold and silver have run nearly straight up since February. They are overdue for meaningful corrections.

Second, the precious metals sector is volatile. Even gold – which has maintained its value for 5,000 years – can be much more volatile than stocks or bonds over the short term. Silver is about two times more volatile than gold on average... and mining stocks – which provide leverage to the price of gold and silver – are even more volatile.

This is why we've urged readers again and again to use good risk-management strategies, like proper position sizing and trailing stop losses.

Folks who put a huge portion of their portfolios in precious metals – or worse, into mining stocks alone – are unlikely to be able to stomach the normal volatility that occurs in every bull market.

As we've mentioned many times, if the recent pullback is keeping you up at night, it likely means you have far too much of your portfolio in these investments. Consider taking some profits and reducing your allocations to a more manageable size.

On the other hand, if you've followed our advice, you can sit tight. We remain long-term bullish and expect prices to move much, much higher in the coming months and years.

While precious metals could fall further in the near term, we would consider it a potential buying opportunity, not a reason to sell. In fact, the recent declines have already pushed several Stansberry Gold & Silver Investor recommendations back into buy range. If you missed out on the big rallies so far this year, this is a great chance to start building a gold and silver portfolio. Get started right here.

New highs (as of 8/26/16): Cisco (CSCO), Invesco High Income Trust (VLT), and Wells Fargo – Series W (WFC-PW).

In today's mailbag, a subscriber is worried about gold stocks... and another has a bone to pick with P.J. and Porter. What's on your mind? How have you been enjoying these quiet market days? Let us know at feedback@stansberryresearch.com.

"As part of my learning could you fill me in on what happened to gold, silver, the miners and junior miners on 8/24/2016? The economy and paper money had not seemed to change. Thank you for your time." – Paid-up subscriber Brent M.

Brill comment: Brent, as we mentioned above, corrections are a normal part of every bull market. The recent pullback in precious metals may or may not be the start of a meaningful (and overdue) correction, but if you've followed our advice, there's no reason to worry.

"Porter I have enjoyed reading your articles and appreciate your insight into the markets and the economy. You have put together a fantastic crew... from Steve to Doc to Matt and I am sure I am missing someone.

"The one person I am not missing is PJ, when you introduced him to your team I was excited and could not wait to read his articles! Talk about not meeting expectations! I understand that PJ is not a Trump fan, and that is fine as everyone is entitled to their own opinions. When PJ wrote that Trump does not understand how the economy works! Really?? How can Trump amass such wealth and success while knowing nothing about the economy?

"PJ, either you are a blatant liar or you are deliberately trying to mislead your audience? Porter, any boss with a shred of integrity would fire an employee that is either telling a blatant lie or misleading your audience!" – Paid-up subscriber Steve Hoffmann

Porter comment: Well, my friend... I can only suggest you learn more about Trump's business history.

Listen... I don't vote. I'm not political in any way. I abhor all government employees equally. But what boggles my mind is how folks who are political can ignore the obvious character defects in their candidates. Is Hillary a crook? Of course. Is Trump a buffoon? Of course. Does it matter a whit which becomes president? Not to me.

P.J. O'Rourke comment: In normal times, if someone called me a blatant liar and accused me of deliberately misleading Digest readers, I would turn my dogs loose on him! (Then, of course, Porter would have to fire me – for violating federal OSHA regulations about safety in the workplace.)

But these are not normal times. The 2016 presidential election has been so frustrating and angering that it has caused a lot of people – Donald Trump included – to say things they maybe wish they hadn't.

I don't like Trump. His Volatility Index is too high. I don't know what he'll do, and it frightens me. I don't like Hillary. Her Volatility Index is too low. I know exactly what she'll do, and it sickens me. Facing a choice this November between being frightened and being sick makes me... sick and frightened. Also, I'm in no mood to pick a fight with someone who, inasmuch as he is a paid-up subscriber, I'll probably like when I meet him in person. Yours, with no apologies given but no umbrage taken...

Regards,

Justin Brill

Baltimore, Maryland

August 29, 2016