This week market relationships underwent a sea-change, with a sudden
realisation that the global economy is in a deepening crisis.
Equity valuations in the developed nations are falling sharply and
corporate bond spreads are widening, triggering a flight to the relative
safety of government bonds. Gold and silver prices have recovered somewhat this
week, with gold now 9% up from its lows of six weeks ago, and silver 8%.
While this has been encouraging for followers of precious metals, it is
probably realistic to describe their performance so far as evidence of a
developing bear squeeze and not yet a sign of something more material. Bears
being closed out should be evident from a fall in open interest on the
futures market, and this may be true in silver, which is our next chart.
Note how open interest continued to fall after early August, despite the
price recovery. Another reason for OI to drop off is the September contract
is winding down, so spread positions were being reduced accounting for much
of the fall. If this is so, then short positions in the managed money category
will still be uncomfortably high.
This is not so evident in gold, which is next.
In this case, open interest has steadied since early August, only picking
up slightly in the last few days. It could be that new spreads are being
opened, rather than new bull positions, but we shall only know for certain
when the Commitment of Traders Report is published this evening.
China's series of minor changes to the yuan/dollar rate has triggered, or
at least coincided with weaknesses in emerging market currencies, verging on
a crash in some instances. The Khazak tenge lost 23% in one day as oil prices
slid lower, and the Turkish lira, which has a poor history, has also fallen
sharply on political turmoil. Other weakening EM currencies range from Brazil
to South Korea, and Thailand to South Africa. Old hands are reminded of the
Asian crisis in 1997, which started in a minor way with the Thai baht coming
under pressure, spreading to other South East Asian currencies and becoming a
full blown regional crisis.
Many of the factors that drove these currencies into a sharp devaluation
are present today on a wider and larger scale, with nearly all equity indices
firmly entrenched in bear markets. Investors are shifting their perceptions
from chasing equity uptrends to protecting themselves, aware that if emerging
markets sink further there is a risk of a full-scale rout developing. That
being the case, gold prices should benefit considerably from accelerated
buying of physical metal throughout Asia.
It seems improbable that the Fed and the Bank of England will persist in
their desire to raise interest rates, particularly since the S&P500 and
the FTSE are reflecting growing investor panic. Instead, unless equities
stabilise of their own accord, there will be a growing likelihood of a new
round of quantitative easing aimed at supporting the markets.
To summarise, precious metals prices are rapidly switching from an
entrenched bear market to conditions that could drive prices significantly
higher over the medium term.
Next week
Monday.
Japan: Leading Indicator (Final).
US: Flash Manufacturing PMI.
Tuesday.
UK: BBA Mortgage Approvals.
US: S&P Case Shiller Home Price, FHFA House Price Index, New Home Sales.
Japan: PPI Services.
Wednesday.
UK: CBI Distributive Trades.
US: Durable Goods Orders.
Thursday.
Eurozone: M3 Money Supply.
US: Core PCE Price Index, GDP Annualised (2nd Est.), Initial Claims.
Japan: CPI, Real Household Spending, Unemployment.
Friday.
UK: Nationwide House Prices, GDP (2nd Est.).
Eurozone: Business Climate Index, Consumer Sentiment, Economic Sentiment.
US: Core PCE Price Index, Personal Income, Personal Spending, University of
Michigan Sentiment.
Japan: Large Retailers Sales, Retail Sales.
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