Are Gold & Silver Prices Behaving Counterintuitively

The decline of the Yen is dominating the market related news lately. During the weekend, the EU finance ministers have loudly expressed their concerns about the impact of the massive Japanese liquidity boost making us think that they had underestimated the effects of the Japanese monetary bazooka.

Currencies

The weakness in the Yen has resulted in the dollar moving higher against most major currencies. That is bad news for the Western economies which are hoping for a recovery through exports.

As the currency war is now starting to accelerate, we can come to the first insights in how exactly this global currency competition plays out. For now, it appears that the last man standing is the US dollar. One could consider it is the best of all bad currencies. Readers should not confuse a relative rise in the dollar with internal / fundamental strength; rather it shows just more relative weakness of the other currencies.

The Australian dollar is near major support, and it could break through it. As the Aussie is a proxy for the sentiment vis-à-vis  commodities, a break through major support levels would be bearish for commodities.

Interest rates

Two weeks ago, we witnessed two rate cuts: the ECB (from 0.75% to 0.5%) and the Reserve Bank of India (from 7.5% to 7.3%)- via David Levenstein. Past week, we were surprised by several more surprise rate cuts:

  • The BoE keeps rates on hold at 0.5% and the size of the asset purchase program at GBP 375 billion.
  • The Bank of Korea unexpectedly cut its key interest rate to 2.5% from 2.75%.
  • The Reserve Bank of Australia unexpectedly lowered its key interest rate to 2.75% from 3%.
  • The National Bank of Poland unexpectedly cut its key interest rate to 3% from 3.25%.

Quoting acting-man.com: “The rate cut in South Korea was the 511th cut in administered interest rates in the world since 2008.”

Equities & commodities

The downward trend in commodities has been interrupted with a bounce off the lows. For now, it remains unclear if a longer term deflationary wave has started.

Equities keep on rising on average volume and weak inflows from retail public. Besides, it is very unusual to see such a long continuation of rising prices, as Sentimentrader reports. The stock market is clearly being driven by the huge amounts of money created by central banks, sitting in major financial institutions.

Gold & silver prices

Where does this leave us with the price of gold and silver? It would appear that gold and silver are behaving in a very counterintuitive way. That is nothing new; it is a “trend” that started with QE4 in December 2012.

There are opposing forces in the markets. On the one hand, gold and silver are under pressure because of declining commodity prices (related to it, a lower Australian dollar), a rising stock market (the asset class that is most negatively correlated with precious metals), and a relatively strengthening US dollar. Lastly, the financial world is not worried about inflation for now.

On the other hand, easy monetary policies are traditionally very bullish for precious metals. The 511th cut in administered interest rates in the world since 2008 should have bullish implications for the metals. The expansion of the monetary base in the US and Japan primarily should also be acommodative for the metals.

For now, the market has chosen to  attribute more weight to the forces that are working against the metals. For now, a new trading range seems to be in place. Because of the negative sentiment vis-à-vis the metals it is not unlikely that more time is needed to break through resistance. A retest of the major low is still in the cards but physical buying remains huge in the East and primarily in China. It should have laid a floor below the gold and silver price.

Although price behaviour seems counterintuitive, maybe it is not from a market point of view. Disclaimer: this is the short to mid term point of view, which should not be confused with the long term view or the monetary value of the metals.

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