Ben Bernanke recently provided some clarity to the confusion surrounding the Fed’s QE stimulus program. He indicated 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 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.
As Fed watchers have pointed out, both Janet Yellen, the Fed governor
nominee, and Fed member Charles Evans have no plans to reduce the
stimulus. “Current low inflation numbers
and diminished credit demand suggest a moderate recovery,” as one economist
pointed out. The economic recovery theme
is ironically the biggest obstacle facing the yellow metal at present. Fear and uncertainty are the two catalysts
which gold feeds upon, and indeed these two widespread investor emotions kept
gold in a strong uptrend until the summer of 2011.
As I noted in a previous commentary, however, an economic slowdown in Asia and/or Europe would have profound
consequences for the global economy and would be a definite stimulus for a
return to gold among safe haven investors, and a return of economic volatility
in 2014 would therefore almost certainly harbinger a revival of interest in
gold as a safe haven investment.
According to the CFTC, combined net gold positions by money managers
were down by some 37 percent for the week ending Nov. 12, led by a 104 percent
increase in short positions. While gold
futures fell 24 percent this year, the MSCI developed world equity markets
index rose close to 24 percent. Sharps
Pixley points out that the worldwide gold-backed ETF holdings tracked by
Bloomberg have continued to fall, declining 0.5 million troy ounces in November
and 24.6 million troy ounces year-to-date.
“So far, various sources support that most of the gold liquidated from
the ETFs have been re-melted into gold bars and
sent to China,” writes Sharps Pixley.
December gold underperformed this week following the “death cross”
technical signal that has been widely
discussed by analysts. Gold broke below the technical
significant $1,268 level on a closing basis and is now in the hands of the
sellers in the immediate term. Chart
measurements suggest a low between the $1,180-$1,200 levels can’t be ruled out
before the latest decline bottoms out in the short term. Keep in mind that gold’s technical path of
least resistance is down as long as it remains below the declining 15-day
moving average.
Meanwhile silver continued its recent slide by closing at $19.90 on
Thursday. Further additional downside is
possible to the $18.00-$18.50 area where the lower
boundary of a wedge pattern intersects in the weekly
chart. Silver’s immediate-term trend is also down
below the declining 15-day moving average, a tool which has done an admirable
job of capturing most of the immediate-term trend in recent months.
Goldman Sachs released a research report this week revising its 2014
forecast for gold. The investment bank
said the yellow metal could drop as much as 15 percent next year due to the
increased downward pressure facing commodities because of accelerating U.S.
economic growth. Of the major financial
institutions, Goldman is one of the few that has the correct understanding of
the relationship between gold and the economy/monetary situation, IMO. Let’s also not
forget that Goldman Sachs, which often moves the market based on the sheer
weight attached to its forecasts by investors.
