Gold And Silver Price Crash Of 2014 Coming?

Both gold and silver went sharply lower this week, especially yesterday and today. Gold in U.S. Dollars closed the trading session and trading week at 1,172.49, a decline of 2.14% on the day. Silver closed at 16.14 U.S. Dollar, which is 1.53% lower on the day, albeit a spike lower during the trading session to $15.65 for only some minutes.

What is happening with the metals? Are the price of gold and silver about to crash to a low of 2014 or has the worst passed?

Before trying to answer those questions, it is important to look at the developing activity across markets. The key point is that the drivers for the gold and silver price are mainly two other key assets: the U.S. Dollar and equities.

Central banks are driving the financial world

Today, the Japanese central bank (Bank Of Japan, also BOJ) decided to launch a mega-money-printing program. The BoJ aims to increase its monetary base by 80 trillion yen annually, from 60-70 trillion yen previously, and boost the average maturity of JGB purchases 7-10 years. When BoJ Governor Kuroda began his current QQE program, he said Japan would reach 2% inflation in two years. The two-year deadline ends in around five months and inflation is still only halfway to the BoJ’s target. There is essentially no chance that the bank will meet this target, even with this new stimulus.

Matthew Weller from Forex.com points out that the BOJ stimulus, combined with Wednesday’s less-dovish-than-expected statement from the Federal Reserve, today’s news creates crystal clear policy divergence between the Fed and the BOJ. “In the US, the Fed ended its third round of quantitative easing by tapering asset purchases by their final $15bn and released a somewhat more hawkish statement than the market was expecting. The bank noted that labor market conditions have improved somewhat, with solid job gains and a lower unemployment rate. The underutilization of labor resources is also gradually diminishing according to the Fed.”

As a result, the US dollar was bid on the back of the Fed’s statement as US Treasury Bond yields rose and stocks fell. Since then the US dollar has gained even more ground against the struggling euro and yen, while the kiwi and aussie have been able to hold their ground on the back of robust investor sentiment and a slightly risk-on tone in the market.

U.S. Dollar strength

According to Matthew Weller, the reaction to the Fed’s statement is somewhat more severe than one might expect, given that the actual course of monetary policy in the US remains very data dependent. While the Fed noted that the likelihood of inflation running persistently below 2% has diminished somewhat, we are still yet to see a meaningful pickup in consumer price growth. Some of this can be attributed to lower energy prices, but even once food and energy prices are taken out, inflation remains stagnant around 1.7% y/y.

Equities

One central bank ends QE, another increases it. This is not a trick, but a treat for the markets. The global equity markets found additional buoyancy on Friday after the Bank of Japan surprised the markets overnight by expanding its monetary easing program to about 80 trillion yen a year, up from Y60tn-Y70tn previously. The BoJ will achieve this mainly by increasing its purchases of longer-term Japanese government bonds. The central bank is clearly worried about the impact of the April sales tax hike, the recent fall back in inflation and lower global oil prices.  Indeed, the BoJ governor Haruhiko Kuroda himself thinks that the economy is at “a critical moment,” pointing out “there was a risk that despite having made steady progress, we could face a delay in eradicating the public’s deflation mindset.” That’s why they increased QE. The markets had already been boosted by the Federal Reserve’s promise of keeping interest rates low for an extended period of time.

Gold and silver

The net effect of this week’s central banks’ decisions has been very bullish for the dollar and also stocks.  With these two assets both rallying, investors have found it difficult to justify holding the safe haven gold, an asset which not only costs money to store but pays no interest or dividends. What’s more, we have also had mostly positive US macroeconomic data, including the first estimate of third-quarter GDP, which showed the world’s largest economy grew by an above-forecast annualized rate of 3.5% in the third quarter. This has lent additional buoyancy to the dollar, causing more pain for buck-denominated assets.

gold_price_chart_daily_31_october_2014

As a result of the above-mentioned fundamental factors, gold has broken below the key support area of $1180/5. This breakdown has therefore given rise to follow-up technical selling. Unless gold stages an unlikely sharp reversal here and close Friday’s session back above $1180/5, the chances are we will see some significant losses in the near future. If the metal continues to hold below the $1180/5 area then most of the exiting longs will be forced to abandon their positions which would undoubtedly increase the selling pressure even further. Others might even be thinking the unthinkable: “if you can’t beat them, join them” and act by reversing their bullish positions.  The yellow metal has already reached the 127.2% Fibonacci extension level of the last rally that started at the beginning of this month, at $1163. The 161.8% extension of the same move is at $1138/9. In between these levels is the psychological $1150 mark which could also be a target. Meanwhile the 127.2% extension of a separate move, the short-lived rally from the 2013 low comes is at the psychological $1111.1 level.

On top, the gold holdings of the largest gold ETF, the SPDR GLD ETF, shows no signs of accumulation. According to Dan Norcini, in an environment in which most commodities are falling in price, and one in which the Dollar is holding up fairly well,  and one in which inflation fears are nowhere in sight, there is not enough Western-based investment interest in the metal to push the price higher. Even with increasing demand from the East there should be no expectation of higher gold prices without an accompanying demand surge in the West; the best the Eastern-based buying can do is to slow the descent of the metal or keep it from plunging even more sharply than it otherwise might have done. It takes hot money flows from the West to generate a bull market in gold, or in any other market for that matter and the simple truth is that those money flows are MIA when it comes to all things gold for the moment.

GLD_gold_holdings_October_2014

 

The most worrisome fact for gold bulls is undoubtedly the collapse of the gold miners in the week which ended on October 31st. The gold mining index GDX closed the week and month on 17.21, some 15% lower than a week ago. Everyone looking at the following chart will agree that the miners do not look constructive at all.

GDX_Daily_chart_2010_October_2014

 

We warned our readers yesterday that capitulation in the precious metals complex is in the air. If capitulation is about to happen, it could bring some relief for gold bulls on the long run, as a wash-out bottom would eventually drive all sellers out of the market. On the other hand, the losses will be huge until the metals and miners bottom. Also, there is no guarantee that a capitulation will not result in a lower trading range.

Are we about to experience another crash of the price of gold and silver, as well as miners, comparable to what we have seen in April and June of 2013? We do not exclude it, given the strong trends explained above: rising U.S. Dollar on the back of a sharply declining Yen and rising equities. On the other hand, were equities about to reverse their course because the end of QE would bring uncertainty and volatility, it could well be that the metals (mainly gold) would benefit from new money inflows.

It is key to monitor how the gold price will behave around the current price, i.e. $1,180. If it fails to break down significantly for at least 3 consecutive days on the daily chart, or if it manages to stay above $1,180 on the weekly chart, there could be hope for gold bulls that the triple bottom has held. However, odds favor lower gold and silver prices ahead, at least in the short run.

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