Ben Bernanke provided some
clarity to the recent confusion surrounding the Fed’s QE stimulus program. He indicated on Tuesday that the near-zero
Fed Funds rate will likely remain at that level long after ending asset
purchases under quantitative easing (QE).
This satisfied Wall Street and provided much relief, allowing a
mini-rally to transpire in equities but providing additional selling pressure
for gold and silver.
Thus the inverse
relationship between gold and the stock market continues to hinge on the
assurance of easy money courtesy of the central bank. While many precious metals analysts continue
to insist that gold will benefit from QE, the evidence is quite clear that the
opposite is in fact the case. Stocks are
the clear beneficiaries of loose money and investors have exited the safe
havens of recent years, namely gold and Treasuries, in favor of equities this
year. Until the massive liquidity
provided by the Fed is in any way reduced, gold and silver will likely continue
to have a tough go of it.
On the supply/demand front, the latest report from the
World Gold Council revealed that consumer demand for gold in jewelry, bar and
coin form increased 26% in the first three quarters of 2013 compared to last
year. Consumer demand, however, was more
than offset by ETF divestment along with clampdown on gold by India’s
government. Barclays meanwhile pointed
out that the market surplus for gold is at its widest since 2005 due to
decreased demand.
According
to Numismatic News, a new record was reached Nov. 12 for sales of silver
American Eagles. The U.S. Mint said total purchases had reached
40,175,000. This surpassed the previous
record high set in calendar year 2011 when 39,868,500 were sold.
“Silver Eagle demand is now snapping up four times the number
of coins that were sold by the Mint in 2007, before the economic crisis upended
the financial world,” according to Numismatic News. “Sales in 2007 were 9,887,000 pieces, which
was still below the 1987 production record of 11,442,335 pieces.”
By comparison, in 2008, sales doubled to 19,583,500 as panic
fueled demand for hard assets. In 2009,
when the stock market was bottoming out, silver Eagle buyers stocked up on
28,766,500 coins, roughly 50 percent higher than the prior year, according to
Numismatic News.
Let’s try and put the latest silver coin numbers in
perspective. Investors were correct to
snap up silver bullion coins during the bottoming phase of the credit crash
between October 2008 and March 2009.
From a monthly closing low of $8.40 in October 2008, the silver futures
price rose to a high of almost $50 in April 2011 before peaking. From there the price of silver has been in a
downward trend for the last two-and-a-half years. Essentially, the buyers were right during the
first two-and-a-half-year rally but have been wrong to keep buying silver coins
in the last two-and-a-half-year decline.
With the silver market in a confirmed downtrend, the path of
least resistance is down and the market is more sensitized to bad news than to
good news. That means that any negative
news developments for silver – which also includes bullish news for the stock
market – will likely be used by sellers as a catalyst to keep the silver
downtrend intact. In other words, lower
silver prices are a higher probability for now.
Until the pattern of declining tops and bottoms is decisively broken, we
have to assume the silver bear market remains intact. Until the bear market in silver has a
confirmed ending, why purchase large amounts of physical silver when the price
could end up going lower? Trying to time
the bottom is a tempting preoccupation with individual investors, but in most
cases it ends up being a costly mistake.
If silver is poised to begin a new bull market in 2014 the
market will surely give us ample time to make new long commitments without
leaving us behind. There is, after all,
a lot of ground to cover before a new upward trend can be established and
there’s also a lot of overhead supply to be dealt with before a new bull market
commences.
Another factor to consider is that if silver does end up
making a lower low in the coming weeks, there’s always a chance that many of
these silver Eagle purchases will be dumped onto the market in the form of
panic selling, thereby resulting in even more selling/supply pressure. Bottom line: let’s wait for the market to
signal its intent before jumping on the silver bullion bandwagon.
