People put too much store in central bankers and
hang on their every word as if they are prophets with a direct line to the
divine. It seems that no one does this more than gold investors. In the past
gold has shown itself to be super sensitive to monetary policy announcements
and investors hope that any indication of further easing would give gold a
We have had enough evidence that central bankers are
no super heroes able to leap tall buildings at a single bound and save the
economy. There are plenty who contend that if the Fed had not stimulated the
economy with zero percent interest rates, two rounds of quantitative easing
and the so called “operation twist”, the economic fiasco would
have been much worse and the recession much deeper, perhaps even a
depression. They go even further and say that the Fed has not done enough,
and if only it had printed more money, we would be out of the woods by now.
The Austrian economists, on the other hand, counter
that there is no free lunch and the tab will be paid later. The short-term
pain of a deep recession would have been more salutary to the economy and
would have eventually built a more robust sustainable recovery, they say.
They argue that the Fed’s actions simply delay, or numb the pain. So
far, even with all the quantitative easing, we have not seen much of a
recovery as the employment report released on Friday confirms. In the best
case scenario the U.S. economy is stagnant. At the worst case scenario it is
going down the hill. That the economy is a mess is the one thing that Barack
Obama and his Republican challenger, Mitt Romney, agree on.
We believe that interest rates cannot stay low
forever. The Fed's interest rate was bought down from 5.25% in August 2007 to
0.25% in December 2008. When interest rates finally rise, the prophets of
doom and gloom will have plenty to rant about.
Just what did QE do for gold? One could
argue—plenty. On November 24th, 2008, which is the day that QE1 was
announced, the price of gold was $819.50. It rose to $1,113.30 by March 31st
2010, which is when QE1 ended. This was a hefty increase of $293.80. The
price of gold rose from $1,337.60 on November 3rd 2010, the day QE2 was
announced, to $1,502.50 on June 30th 2011, which is when QE2 ended. This was
a sizeable increase of $164.90, but smaller than in the first round. Does the
smaller increase in the second round suggest that investors are becoming less
sensitive to such measures by the Fed? Has gold lost its “safe
haven” status and become a “risk on” asset?
Without any clear signs of the next round of QE, we
will search the stock market for clues regarding gold and silver. We will
start with the S&P 500 Index long-term chart (charts courtesy by http://stockcharts.com.)
In the chart, we see that stocks have rallied
recently and approached but not yet moved above the level of the previous
2012 high. It seems that once the S&P moves above the $1,425 level and
verifies this move, the picture will be bullish here once again. For now, we
continue to view the outlook as mixed with a resistance line around 1.5%
above Thursday’s closing price level and RSI levels neither overbought
nor oversold at this time.
Let us now move on to the financial sector.
In the Broker Dealer Index chart (a proxy for the
financial sector), we saw a bit of a rally for the
financials last week, but their underperformance over the past five months
remains clearly evident. The small rally seen last week does little to atone
for the declines seen in two-thirds of the weeks since the mid to late-March
high. In short, there is really no good signal for the stock indices in general
To better see what possible effects could higher
stock prices have on the precious metals market, should a rally in the
S&P 500 emerge, let’s take a look at our own tool intended for
measuring intermarket correlations.
Matrix is a tool which we have
developed to analyze the impact of the currency markets and the general stock
market upon the precious metals sector.
Both gold and silver are positively correlated with
the S&P 500 Index in the short and early medium term. Hence the possible
rally in the stock market could help these two metals reach higher prices in
this time horizon.
Yet one cannot forget that the currency markets are
strongly and negatively correlated with precious metals at this time. If the
medium-term rally in the USD Index continues, the downward pressure on
precious metals prices will remain in place as well. Note that the
metals’ reaction may be delayed by a day or a few of them in response
to strong moves in the USD Index, because the nature of the relationship is
medium-term, not a short-term one.
Summing up, the overall picture for stocks is best described as
mixed or unclear at this time. A short-term rally has been seen recently but
an important resistance line is in place and the strength of the rally will
be determined when this previous 2012 high price level is tested. It simply
seems best to wait and see before commenting further here. Should such a
rally in the stock market emerge, gold and silver could benefit from it in
the short and medium term, as suggested by the Correlation Matrix. For now,
this bullish factor is not in place. One should still bear in mind that such
a scenario would be thwarted by a strong rally in the USD, as the correlation
between these two metals and the dollar is still strong.
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Thank you for reading. Have a great and profitable week!