Gold and silver, both got bludgeoned yesterday. But silver, saw an even more severe fall on a percentage basis. December silver prices plunged to settle 5.3% lower Tuesday, marking its worst one-day drop since Jan. 29, 2015, and pushing the white metal to its lowest settlement, $17.713 an ounce, since June 23. Gold and silver have suffered from waning physical demand. A recent report by Thomson Reuters said sales of gold and silver coins and bars in the U.S. fell between 40% and 50% in the third quarter. Silver tends to be more sensitive to pullbacks then gold. Gold’s moves were related to intensifying concerns that interest rates might be dialed up sooner than later, which could dull the appeal of precious metals which don’t bear interest. Silver is also more tied to not just bets linked to expectations of global growth, rather than just inflation and fear like gold. The rumours of European Central Bank tapering its massive bond purchases also roiled the gold and silver markets.
As mentioned above, one of the big stories precious metals investors are watching closely at the moment surrounds the ECB. For some time now, the European Central Bank has been playing a policy from the Federal Reserve’s playbook called Quantitative Easing. The way this works is the central bank creates more money and purchases bonds with it. As a result, bond rates drop, leading to further investing in corporations as well as easing lending conditions.
However, at this point bond rates in Europe are worrisome to say the least. Because of excessive Quantitative Easing, long-term yields and short-term yields are getting closer and closer together. As a result, long-term loans don’t quite generate the profit that they did in the past, which could create an economic problem on its own.
As a result, the European Central Bank is expected to either end Quantitative Easing all together… which I believe is highly unlikely. Or, the central bank will start to taper off Quantitative Easing, taking a slow and steady approach to finding a solution to the problem. Given the ECB’s history, the latter is more than likely the case.
While it may seem as though the ECB’s decision with regard to Quantitative Easing v/s gold and silver are completely separate topics, the truth is that they are actually closely related. This is the result of the fact that gold and silver are largely looked at as a safe haven investment, combined with the fact that bonds are looked at in the same light.
The low returns on long-term bonds have been a great thing when considering the prices of gold and silver. With such low yields, investors who weren’t interested in risking their money in the market saw little value in the safe properties of bonds. So, they started to look to other safe investments with stronger yield potential. Precious metals like gold and silver fit the bill. However, if the ECB stops the Quantitative Easing process, bonds will likely start to take more of a share in safe haven demand, putting pressure on gold and silver.
I have a relatively mixed opinion of what we can expect to see from gold and silver. While my long-term opinion on gold and silver remains bullish, the short-term outlook seems to be becoming grimmer. As the threat of increased interest rates from the Federal Reserve persists, the ECB tapers off QE, and economic conditions around the world seem to be improving, we’re likely to see declines. However, there are still questions with regard to the global economy that only the most entrenched experts seem to be discussing. These threats are likely to cause continued volatility in global economic conditions, helping to provide support for further long run growth in the price of gold and silver.
Gold and silver might have further to fall in the near term, but market bulls expect the retreat to offer investors who missed the first-half 2016 precious metals’ rally a strong buying opportunity. There are many undeniable and solid reasons to support this view.
Firstly, more on the reasons for the plunge, to understand the viability of the reasons for the eventual violent upswing in gold and silver.
The selloff took gold futures well below the technically psychologically important level of $1,300 and ounce—a level not seen since June 23 and the Brexit fallout. This has shifted the short-term picture for the yellow metal and evidence is pointing to additional sell-side pressure, pushing gold prices down further from here.
What inflicted most of the damage?
U.K. Prime Minister Theresa May on Sunday indicated she would pursue a clear break from the European Union by the end of March. That fueled a sharp drop in the British pound which has benefited the dollar. The British pound fell to a 31-year low against the dollar after the release of a timeline for Britain’s exit from the European Union. And a stronger dollar often pressures prices for gold and silver, which are traded in the greenback. The absolute biggest reason for the drop in price is the enormous liftoff in the U.S. dollar. The ICE U.S. Dollar Index was trading 0.4% higher as of gold’s settlement Tuesday, and was already up about 0.7% week to date.
Federal Reserve officials called this week for higher U.S. borrowing costs amid signs of an improving economy. Oil prices have also been rising, stoking inflation worries and boosting the odds of a rate hike. The down trend for gold and silver was further boosted by hawkish comments from Richmond Federal Reserve President Jeffrey Lacker, which gave the dollar another leg up. In a speech Tuesday, Lacker, who has been a consistent advocate for higher interest rates since last summer, said the Fed should adopt a strategy of raising interest rates before inflation moves higher like it did in 1994. Lacker isn’t a voting member this year of the Fed’s rate-setting policy panel. Fed Bank of Cleveland President Loretta Mester said Monday the economy is ripe for a rate increase.
With gold’s previous floor at $1,300 broken, prices could drop to $1,265, or even $1,240, before climbing back toward 52-week highs, with the last line of defence at $1,210.
Negative / low real interest rates in an era where global debt has reached epic proportions, will ensure gold and silver remain attractive. Looming risks from the U.S. Presidential election in November to Britain starting talks to leave the European Union next year may boost its role as a haven, said Barnabas Gan, an economist at Oversea-Chinese Banking Corp. in Singapore. “As quickly as gold fell, as quickly gold could rally back,” Gan said Wednesday. “Weak inflationary pressures may once again lift gold prices back to their previous shine.”
This selloff, coming ahead of the key September payrolls number due Friday, “sets the stage for even more volatility.” A disappointing jobs number would send gold significantly higher, while a positive report would exacerbate the downward trend.
The scale and the speed of the selling suggest this is not normal long-liquidation or profit-taking, Ross Norman, chief executive officer at Sharps Pixley told MarketWatch
While prices sank on Tuesday, pummeling miners’ shares, global holdings in exchange-traded products expanded. The assets rose 0.2 percent to 2,036.5 metric tons, according to data compiled by Bloomberg. That’s near the peak of 2,039.9 tons reached on Aug. 11, which was the highest since 2013. It’s also worth pointing out that the latest Commitment of Traders report from the US Commodity Futures Trading Commission was extremely bullish. It showed that gold traders increased their bets on rising prices very sharply in the week to September the 30th. It is clear that the rationale for buying gold and silver is more powerful than any time in living memory and these retracements have been few and far between.
The U.S. economy will grow 1.6 percent this year, down 0.6 percentage point from the projection in July, the IMF said. U.S. growth will pick up to 2.2 percent next year, compared with a forecast of 2.5 percent three months ago. With economic growth on the decline, presidential election in November, among many other reasons, its highly unlikely that the US Fed will opt for a rate hike in the next few months. The question for investors is whether or not Fed Chair Janet Yellen can hold her ground on continuing to punt. I don’t know the answer to that but the markets are beginning to believe she won’t be able to. The macroeconomic trajectory has not changed, and is not changed, by the policy prescriptions being sought by Fed bank presidents or other global government leaders. That trajectory mandates a fiscal response that will have to be supported by monetary policy because private-sector activity everywhere is increasingly evidencing an inability to achieve secular growth without government support. As that inevitably re-emerges as the primary policy and market narrative the immediate distortions referenced above will reverse. But I don’t know how long that will take or how far market participants will push the current meme and market prices as a result.
This surely has been a rather surprising quarter on many fronts. One of the most has been the fact that central banks have quietly been on a gold buying spree. Since 2008, the guardians of paper money have bought 2,800 tons of gold. The Chinese and the Russians have done most of the buying; the western central banks have simply halted their mass sales. In these uncertain times the central banks seem to have rediscovered the yellow metal’s ancient allure. So why are the central bankers buying the stuff? Have they lost confidence in themselves? Their renewed appetite for bullion exposes the central bankers’ dirty little secret. If central banks really had confidence in themselves, i.e. in paper money, they would get rid of all the gold in their vaults, sell it all off at high prices and put the proceeds into dollars, euros or yen. Instead they’re clinging onto this slightly primitive relic as something to hold on to if things really go down the drain.
However, be warned that all the gold bars gleaming reassuringly in the central bankers’ vaults would cover only a tiny fraction of the paper liabilities now floating around the globe.
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