Lots Of Leverage Left To Unwind

The very weak bounce in gold and silver increasingly suggests at least one more leg down in the near term, probably in conjunction with equities, before a significant bounce occurs.

We've often noted the extreme amount of leverage being used lately by equities and precious metals longs, and consumers in general.

It's instructive to further note that the recent collapse in gold and silver coincided exactly with the biggest, albeit still very minor, equities market slide so far this year.

The charts above also prove correct our ongoing prediction, going back to 2011, that precious metals would lag equities.  In fact, "lag" is an understatement.  Gold touts rushed to show charts of the DJIA as priced in gold in the past, but surely haven't done so recently.  And let's please not pretend that gains years ago make the recent huge losses OK.  "Paper losses" are real losses no matter what you call them.

It's hard to say how much leverage was unwound in the recent drop, and we suspect not much.  In any case, clearly investors and speculators alike chose to sell the grossly underperforming metals when the margin calls came in.

Imagine what happens when there's finally a 3-day or 3-week drop in equities? 

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