Precious metal prices appear to have entered a new stage. With
increasing frequency, and regularity, the price of gold and silver has
been swinging in volatile fashion. These volatile price swings have
likely caused many individual investors to become reluctant, even
fearful, of taking on fresh positions. After substantial runs to fresh
highs, prices over the last week have whipped back and forth in a
violent manner, making trouble for trend followers. How long might it be
before these troubling times are over and a clear trend is
re-established? Or better still, how far and in which direction must
gold prices move before the market settles down and volatility softens?
Past performance is not indicative of future results.
***chart courtesy of Gecko Software
Precious metals have always been considered to be welcome stores of
value during uncertain times. That investors are facing uncertain times
is demonstrable; just look at the price moves of almost any investment.
Few are steady in the current environment. The customary pre and post
Thanksgiving rally in stocks did not materialize, but the day after it
sure did! America continues to react to happenings in Europe, and while
the US dollar has recently strengthened in a flight to quality versus
other currencies, it looks to be correcting amid an uptrend. What's
The national debt is now over 15 trillion dollars while the annual Gross
Domestic Product is only $14 trillion. In other words the value of all
the goods and services that generate income in America is now exceeded
by the nation’s debts. While the US dollar strengthens, it is because
for now it is deemed the lesser of two evils. A stronger dollar weighs
on commodity prices, especially gold.
Market participants might be surprised by gold’s continuing weakness and
some are likely questioning gold’s safe haven status. However, the
fundamentals of broad-based global physical demand remain very sound as
evidenced by recent central bank gold buying data. Russia bought 19.5
metric tons of gold in October bringing their total gold reserves to
871.1 tons according to IMF data. Belarus increased its holdings by 1
ton; Colombia by 1.2 tons; Kazakhstan by 3.2 tons; and Mexico by 0.9
ton. Data also shows that Germany reduced reserves by 4.7 tons and
Tajikistan cut reserves by 0.4 ton. If central banks are buying, what
message does that convey?
Additionally SPDR Gold Trust, the world's largest gold-backed
exchange-traded fund, reported a rise of 3.631 tons to 1,293.088 tons in
its holdings. Commerzbank said recently that they expect to see gold
trading at $1,800/oz by the end of the year. Barclays says it is
sticking with a fairly bullish call for gold and says it sees the price
at $1,875/oz in Q4, and according to Reuters. Deutsche Bank says they
expect periods of risk aversion to remain through 2012 and their
strongest conviction trade remains long precious metals and specifically
Gold prices have corrected from record highs yet there is evidence of
inflation clouds gathering. Food prices are up a full 13 percent this
year. Inflation statistics however do not seem to verify this in CPI as a
whole. It feels as though the foundations of future inflation have
already been laid. There is still a piper to be paid for all of the
money that was created as part of the stimulus efforts since 2008.
As for what is happening in Europe, two main potential outcomes exist:
Either the euro zone splits apart or it binds closer together. The euro
may change its make up or face the emergence of a deeper political union
in which a federal Europe takes control of national budgets — something
that would lead to serious political, legal and financial consequences.
With financial panic now threatening to move beyond Italy and Spain and
into Belgium, France and Germany, the euro zone’s paymaster, the
pressure to arrive at a solution is at a new level of intensity.
The financial contagion in Europe is pushing already fragile global
economies towards recessions, and increasing the risk of the world
slipping into global recession is rising significantly. Indeed, as
analysts have warned for many months, there is a real risk of a global
Depression given the scale of the debt levels in most western countries
and the massive imbalances globally.
Although most of the focus has been on Europe in recent weeks, markets
should cast an eye on the not-so-inconsequential matter of the appalling
US fiscal position which could deliver further market volatility and
see the US dollar come under pressure again. Washington's latest “Super
committee” effort to come to grips with the mounting debt seems to have
ended in failure when negotiators announced they could not reach a deal.
This failure with cutting the US government's crushing $15 trillion
debt looks set to support gold.
Gold and silver prices reflect market forces and what investors are
experiencing right now are uncertain and unprecedented times. Precious
metal prices have gone up substantially and the violent correction to
prices is a result of that move. The longer term likely bodes well for
another round of higher prices, but it will takes time for markets
settle down and get accustomed to their new phase. It is easy for some
talking heads to banter in the way they have always done - a really
active market with fresh price highs is just a bubble waiting to burst
or a story to take an alarmist view on. These sound bites might be good
for the quick pace of daily news, but precious metals are unlikely to
fade as fast as runway fashions or starlets. Remember to keep the macro
view in mind - there is still a long road ahead for the global economy.
Disclaimer: The prices of precious metals and
physical commodities are unpredictable and volatile. There is a
substantial degree of a risk of loss in all trading. Past performance is
not indicative of future results.