Critical Juncture For Silver and Gold

With the Fed's latest iteration of QE, the question many are asking is whether risk assets continue their bullish move or if the market will once again shrug as it did following QE3.  An an interpreter of price, the question is best answered through relative movement, and by considering what the Fed wants – nominal growth.  What that means is that the Fed wants some combination of actual inflation and actual growth to push the economy into escape velocity mode.  Of course, just because the Fed wants it does not mean it will happen, but that seems to be the goal of monetary policy now.

So does price think it's going to work?  It seems plausible, particularly when considering the relative behavior underway in markets.  Take a look below at the price ratio of the iShares Silver Trust ETF (NYSEARCA:SLV) relative to the SPDR Gold Trust Shares (NYSE:GLD).  As a reminder, a rising price ratio means the numerator/SLV is outperforming (up more/down less) the denominator/GLD.

The ratio now is at a critical juncture given that it has crossed its own 20-day moving average, but is still within what appears to be an uptrend of leadership.  If a breakout in silver's strength occurs, it might mean that further risk-sentiment is likely in markets, which is likely to make gold rally, but not to the same extent as silver and other more industrial-sensitive commodity plays.

Silver is often referred to as “poor man's gold,” but the truth is it is an imperfect substitute for the yellow metal.  Silver tends to be much more sensitive to industrial demand, while gold is less so on a relative basis.  As such, when silver outperforms gold, it means money is starting to bet on an increase in industrial production and global reflation.  Note that the ratio rallied in January and February during the best first quarter for equities in a decade, underperformed throughout the corrective period of April-May, bottomed in early June as the melt-up began, and has since fought higher.
 

Gold Tests $1,700 On Discount Buying, Possible European Rate Cut

Gold has once again fallen victim to global economic concerns, dropping to a four-week low this week on the back of US budget talks and the ever-looming threat of the fiscal cliff. Investors engaged in another commodities sell-off, sending gold to $1,686 on Wednesday, its lowest price this week. But what goes down must, at some point, come back up — and after a two-session decline, gold investors can breathe a little easier: Thursday saw spot gold prices back to toying with highs above $1,700 per ounce.

As volatile as gold has been of late, investors buy it up whenever the price is right. The yellow metal’s discounted price has presented investors with a good buy, and many were taking advantage of that on Thursday.

On Tuesday, Bart Melek, head of commodity strategy at TD Securities, told Bloomberg, ”gold is being sold along with just about everything else in commodities with the worries on the fiscal cliff.” Gold, which is widely known as a safe haven asset, is just as susceptible to economic concerns as other commodities, as has been showcased by “knock-on effects” brought on by the threat the fiscal cliff poses to the global economy.

Gold investors are waiting with bated breath for Friday’s release of the non-farm payroll data and the upcoming Fed meeting slated for next week, where hopefully a resolution will be reached regarding the fiscal cliff. If the US is unable to save itself from falling off the cliff, “the possibility that a $600 billion package of tax hikes and spending cuts due to kick in in the New Year could push the world’s biggest economy back into recession,” according to Reuters.

Also helping gold shake off some of its losses is renewed interest in safe-haven buying spurred by European Central Bank (ECB) President Mario Draghi’s comments at a press conference. Draghi hinted further interest rate cuts may be put in place to boost economic growth in Europe. The ECB has cut its growth forecast for the year, anticipating a contraction of 0.5 percent, 0.4 percent higher than originally expected. Low interest rates are considered inflationary and therefore bullish for precious metals.