Sunday, June 3, 2012

Gold & Silver Rally Hard Out of Bottom. What Next?

I'm on Twitter for more regular (albeit brief) thoughts on direction of the metals and I regularly share worthwhile links and resources. You can follow my account here: @BullionBaron.

Thought I would post a brief update on where I think Gold/Silver are heading following my posts two weeks ago:

On Friday Gold saw the largest move higher in price since January 2009, closing 4.2% (US$66) higher. Impressive. In comparison Silver only managed a rise of 3.5%.

Click Chart To Enlarge
The move higher in Gold followed the release of US unemployment data where employers added a paltry 69,000 jobs to their payrolls last month, the fewest since May last year. The unemployment rate rose to 8.2% (the first rise in 11 months).

This data followed a recent revision of the US GDP lower in Q1 to 1.9% (from 2.2%) annual growth rate. Other recent poor data coming from the US such as the Philadelphia Fed Index and Chicago PMI are suggesting that any hope of a US recovery is faltering.

Gold rallied (and the USDX fell) on the basis that this poor economic data will likely end in further US stimulus (quantitative easing). In the case that it does, as well as a recent Gold bottom it's also very possible that the USDX has put in a major top, with recent sentiment levels reaching higher than those seen at other major tops (source of below chart is Smart Money Tracker, recommend a read of the latest article here):

Click Chart To Enlarge
Of course this slow down hasn't only been specific to the US. Many global economies which have been jacked up using stimulus measures and are now starting to fade. This includes China and of course Australia. In the words of Pimco's El-Erian "Right now we seem to be in a synchronized global slowdown".

So that begs the question, what are global central banks and governments going to do about it?

I refer back to this snippet from the recent G8 meeting:
Our imperative is to promote growth and jobs.

The global economic recovery shows signs of promise, but significant headwinds persist.

Against this background, we commit to take all necessary steps to strengthen and reinvigorate our economies and combat financial stresses, recognizing that the right measures are not the same for each of us.
Unless such statements are empty promises to try and jawbone sentiment higher then I think we should be prepared for further easing in the very near future and as the statement suggests, there may be different measures in different countries. 

Australia still has room to move on interest rates, but in the US where rates are already at rock bottom they will have to rely on other measures.

The next FOMC meeting (most likely platform to announce further easing) is June 19th and 20th. Here is a short snippet from the last FOMC meeting in April:
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth to remain moderate over coming quarters and then to pick up gradually. Consequently, the Committee anticipates that the unemployment rate will decline gradually toward levels that it judges to be consistent with its dual mandate.
So that begs the question, is the Fed prepared to move aggressively in advance of a deterioration in economic growth and jobs? Is the down tick in growth and uptick in unemployment enough to see them act?

I suspect at the minimum we will see a continuation of existing "policy tools" in use (such as a continuation of "operation twist" which was otherwise due to finish at the end of June). Whether the Fed will engage in any new activities or if not whether the continuation of Operation Twist will be enough to stimulate economic growth is yet to be seen.

Of course the other big drag on global growth and market sentiment has been continued Eurozone issues. How will Greece vote in the upcoming elections? Will there be a Grexit or Spaxit (Greece or Spain exit from the Eurozone) and what bearing will this have on the markets?

This is my best guess as to what we see over the month of June:

Greece will vote for the pro-bailout/austerity parties and will remain in the Eurozone (for the time being!).

The Fed will continue Operation Twist, but won't yet engage in new asset purchasing.

If we did see a Greek exit from the Eurozone I think co-ordinated central bank and government intervention would be seen almost immediately in attempt to add global stability and liquidity, like we saw in November last year (but on a much larger scale and variety of activity).

Given the above views I continue to expect that the recent low in Gold (and I called the bottom within hours of the price hitting the low) was a major one. In Australian dollars the price was deep into what I consider my "buy zone" and it has since rebounded solidly higher (in part also driven by a falling AUD):

Click Chart To Enlarge
In US Dollars Gold has rebounded from the lows and my expectation is that over the course of the next few months it will start feeling out a new trend line which will be steeper in pitch and ultimately drive Gold towards it's parabolic "bubble phase":

Click Chart To Enlarge
As I pointed out in my posts a couple of weeks ago, the rebound out of a similarly oversold condition in Gold during late 2008/early 2009 saw the metal rise 48% in a matter of only 4 months. In the event of continued Fed easing and a somewhat stable Eurozone I could see a similar significant rally occurring, pushing the price to new record highs above $2000/oz.

My expectations for Gold and Silver over the short term are largely based on the expectation that we will see further easing to try and fuel growth. If this easing is not seen, Greece exits the Eurozone and we see another liquidity/credit squeeze such as that seen in late 2008 then of course there is the possibility for lower Gold prices. Perhaps even as low as US$1200-1300 as suggested by some. However in such a scenario I would expect the Australian Dollar to be smashed, resulting in a local price that remains relatively similar to what it is today (US Gold price of $1300 with 80c AUD results in local Gold price of AUD$1625).

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  1. time will tell. Not enthusiastic enough to employ leverage to buy more.

    1. +1 obakesan, happy to keep adding without leverage. Having a small position in the miners is enough leverage to movements in the price of Gold to me.

  2. Watch the miners.
    Aussie market about to open in about an hour and futures are pointing to a big drop in the ASX. If miners diverge from that I'll take it as a positive sign and probably pick one or two companies to buy on leverage. Keen to pick up some bullion as well but will probably hold off on this unless there is a pullback that clearly shows it won't go below recent lows.
    Until then I'll stick with my plan to buy a little physical every month.

    1. Would be surprised to see our miners drop after a 6.74% rise in the HUI on Friday in the US. Our miners may not do that well, but expecting the XGD to put in at least a 3-4% move higher.