13 June 2013

Gold and Silver Outlook

Metal markets to remain under short-term pressure as the global economic outlook and central bank policies remain uncertain.


Gold and Silver have recently lost favour as equity markets continue to benefit from the new normal of central bank easing policies with no clear end in sight. The longer-term outlook for Gold and Silver still remain bullish as core fundamentals have not changed and escalating G20 debt continues.

Short-term: Bearish


Gold prices are under pressure since Q3 2012 due to reasonably positive market sentiment across the G20 over that time. The safe haven motive for buying Gold has somewhat receded and investors are not so worried about holding commodity currencies, commodities, USD and equities.

Equity markets remain close to their highs in most major markets. Risk appetite is reasonably strong and sentiment towards macro data is also strong. Most market participants believe that the US is gradually improving, adding jobs, improving consumer spending and recovering. As long as this view holds we are likely to see continued USD support and volatile ranges in Gold.

Speculation about Fed winding down QE measures is helping the bullish USD story/view. Consequently, lacklustre macro data in the US (and from other developed economies) could sway investors into anticipating further QE and in turn, USD weakness/Gold strength. It is worth bearing in mind that all instances of QE in the US have led to speculative selling of USD and on-going USD weakness as risk-appetite kept picking up alongside equity market strength and commodity price increases.

In the short-term Gold is likely to fall further and consolidate. The largest retracement was in 2008 due to the GFC. Gold fell from $1026 down to $681 (-34%) before resuming its up-trend and hitting an all-time high of $1,921 in Sep 2011 (partially due to worries about Greece, a potential EU exit and worries about debt/default contagion in Europe). From this we can see that precious metals can make swings in excess of 30% and maintain a predominant trend.




Medium-term: Bearish turning Bullish


In the medium term, Gold is likely to consolidate and find strong support as investors enter fresh long positions at lower levels. The selling pressure in Gold over the past 6 months is almost certainly speculative rather than a rush to USD due to liquidity/leverage pressures at major banks and amongst large investors. In my view, Gold prices are correcting within a fundamentally strong up trend.
Demand for physical Gold is growing every year due to huge consumption demand from large-scale consumers such as India and China. Demand for physical Gold amongst central banks remains flat, although, if and when central banks decide to add to their holdings as a form of diversification against weakening fiat currencies, Gold prices could spike higher very quickly.

Note: A 34% correction from the record high of $1,921 (a repeat of 2008) would mean Gold is trading at $1,270 (the 38.2% fib level). A break here is likely to extend losses down to $1,100 fairly quickly as speculative longs are squeezed out. Volatility around this level is likely to be very high.

Long Term: Bullish


There is a clear up trend dating back to 2001 (and earlier). The largest retracement was in 2008 due to the GFC. Gold fell from $1026 down to $681 (-34%) before resuming its up-trend and hitting an all-time high of $1,921 in Sep 2011 (partially due to worries about Greece, a potential EU exit and worries about debt/default contagion in Europe). From this we can see that precious metals can make swings in excess of 30% and maintain a predominant trend.

Over the long-term, long Gold positions are favoured but due to the extreme volatility of Gold and precious metals in general, it can be difficult to enter into a buy position with leverage and a speculative motive. Physical Gold has proven more popular amongst long-term investors due to reduced costs of doing so compared to leveraged trading, ETF's, funds or other investment vehicles.

Core View:


My core view is that QE polices in the G20 are here to stay - as a newly created policy mechanism by central banks in order to maintain the status-quo (as shown by Japanese escalation of its QE programme in 2013). Speculation that the Fed will soon remove additional liquidity and begin ‘normalising’ monetary policy is unfounded in my opinion because macro data and sentiment have only marginally improved despite trillions of dollars in Fed stimulus over the past 5 years. Fed stimulus measures have only marginally improved market conditions in terms of sentiment rather than stimulating the US economy at the core level. It seems the markets are now addicted to QE measures, so much so, that every time a negative wave of macroeconomic data hits the Fed’s bows, expectations for further easing are formed.

In the US, newly created jobs remain in the low-skilled or government sectors rather than in the private or high-skilled sectors. This undermines the argument that the US is reducing its level of unemployment and is recovering strongly enough to justify unwinding QE measures in the short-medium term. The US recovery, to a large extent, is illusory and highly speculative.

In conclusion, I think Gold will continue on its ST correction but resume its LT upward trend due to renewed concerns about economic recovery in the G20, escalating private and public debt in the G20 and most importantly of all, the debasement of fiat currencies via QE by central banks. The key questions are whether the retracement will be a significant as the one in 2008 and what’s the best vehicle to gain exposure to Gold (taking into consideration the time horizon of the investor).

Gold or Silver?

Gold and Silver are extremely closely correlated (0.9-1.0) even on short-term time-frames. By looking at the Gold-Silver ratio we can see how that correlation changes over time and can also provide trading signals.




The ratio has been trending higher since 2011 which means Gold is becoming more expensive relative to Silver. This suggests that long Gold and short Silver hedged positions are optimal given the volatility of precious metals.




Despite the fact that Gold is currently correcting off its highs, Silver is correcting more strongly because as an asset Silver is more volatile which tends to suit scalpers and short-term speculators.




Commissioned by Think Forex