Commentary

By Cody Willard

The potential for a black swan event in gold and silver exchange-traded funds appears to be growing. Im not making an outright call on such a scenario, but I am fearful that precious metals ETFs could crash even as gold and silver spikes higher. Im always on the lookout for such events and Im finding data and pricing set-ups that suggest a coming meltdown.

Ill soon get out of our recent Revolution Investing SLV trade. Id like to get out of the iShares Silver /quotes/zigman/417006 /quotes/nls/slv SLV trade completely in the next week or so and let the physical silver (and gold) remain as Ive said before, forever. This SLV chart is straight up in the last five days and is making me queasy.

As you know I dont trust the paper ETFs like  SLV or the SPDR Gold Trust /quotes/zigman/41663 /quotes/nls/gld GLD for the long-term and this was just a trade. This SLV trade has been a classic example of the approach of trimming down slowly in scale with tranches after having slowly scaled into the position on tranches, as was the strategy Id outlined at the time.

Speaking of not trusting the precious metal ETFs like SLV or GLD, take a look at this chart courtesy of Comex showing the amount of registered gold in their vaults.

If the people and investors and traders owning all the promises of delivery of that limited amount of physical gold available in Comex and other dealers vaults, theres a possible black swan-like breakdown scenario for the ETFs versus that of the price paid for physical gold and silver. That is, there could be a scenario where theres a run on the physical precious metals available for delivery just as theres a panic over the ability of the precious metal ETFs to delivery the physical gold and silver which they themselves are promising.

Do I sound almost crazy by outlining that potential scenario? Well, thats good, because black swans are more than just out-of-the-ordinary events, as noted in Wikipedia:

A theory was developed by Nassim Nicholas Taleb to explain:

The disproportionate role of high-profile, hard-to-predict, and rare events that are beyond the realm of normal expectations in history, science, finance, and technology

The non-computability of the probability of the consequential rare events using scientific methods (owing to the very nature of small probabilities)

The psychological biases that make people individually and collectively blind to uncertainty and unaware of the massive role of the rare event in historical affairs

So, by definition, a black swan event sounds crazy until it hits and then the masses will look back and rationalize how they werent prepared for it. And I would fully expect the multiple paid for stock market earnings would immediately contract in such a black swan event bringing on a crisis in confidence amongst all investors. Heck, there could be another run to the relative safety of Treasurys in such a scenario.

Its starting to feel a little bit slippery out there in the stock markets. To the downside, that is. I am bidding on some VIX calls for my personal account. Why? Well, take a look this one year Nasdaq /quotes/zigman/12633936 COMP chart.

The markets can fall a long way, 10% or more, and still be up nicely on the year. Are you prepared if the market were to go back to even on the year? Could happen, you know, even as I think such a dramatic collapse from here in the next five months is unlikely.

Ill have more on the SLV trading details in next weeks Revolution Investing. In the meantime, dont be one of the masses. Be prepared, be flexible and be contrarian, just in case the next black swan comes along when you least expect it. Which again, be definition, it basically has to.

Cody Willard writes  Revolution Investing  for MarketWatch and posts the trades from his personal account at  TradingWithCody.com , which is not affiliated with MarketWatch. At time of publication, Cody was net long VIX, SLV, gold and silver. Follow Cody on Twitter at  twitter.com/codywillard .

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