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Commodities update – precious metals

Gold has seen a flurry of activity in recent weeks and months. After retracing from a high of 1900 US dollars per ounce last year to a more moderate level of 1650, the precious metal saw a steep fall from 1650 to 1150 in the early part of the year but recently went back to 1434 US dollars per ounce. This marks an eleven per cent rise and many might argue that this move broke the overall down trend for gold in the previous periods. Others may see it as the top of a bullish correction and nothing more.

There could be a retest of the bottom of the channel at 1408 but the expectation is for a period of consolidation and possible return to lower levels, especially given the up move was very strong and was without significant correction in its entirety.

Fundamental factors will also intervene on the technical outlook. Any possible direct action against Syria may provide impetus for a rise in gold, even if in a bearish period. The Federal Reserve’s policy outlook is also a major factor in the future of gold.  It was the specter of the tapering of quantitative easing that sparked the large down movement in gold briefly taking the metal to 1150 US dollars per ounce. Look for more rhetoric to keep gold under pressure. It is likely the recent rise in gold prices may have been in part due to the toning down of a quick withdrawal of stimulus. Any delay in tapering will support gold, but it is unlikely to provide as pronounced a move as any talk of speeding up of the removal of bond purchases on the part of the Fed.

Other news that may affect gold prices are smaller but still significant stories such as a strike in South Africa that will bring gold production at some large mines to a complete halt. 

The Indian Rupee has fallen to its lowest levels ever and Indians, traditionally gold buyers of jewelry to hedge against inflation, will likely go on a buying binge as the currency seems to have no support. 

Yet even with these events leading to a big local effect, the global demand and supply picture for gold is likely to be still in the electronically traded funds and not the precious metals itself.

Silver on the other hand would seem less prone to recent news but yet has seen an even stronger up move from 19.14 USD dollars per ounce to a recent high of 25.13, more than a twenty-two percent move. 

This is much more than gold’s eleven per cent rise, and there are signs gold’s second cousin may not be able to sustain the higher prices. Since the top of the channel at 25.13, Silver fell back to 23.33 before recovering to 23.53.

 Given that silver broke its rising trend earlier than gold, it looks set to be the driver in the metals market, though some divergence is possible to detect. Particularly at the lows, gold held on to its position as silver fell much more briskly. There could be a continuation of this trend with silver having much more to give up on a retracement basis than gold does, at least judging by their respective percentage gains.

Silver continues to garnish demand from the medical and electronics sectors and production looks relatively steady. However one recent news headline surrounds silver supply and this was the find and subsequent retrieval by Odyssey Marine Exploration of 110 tons of silver, equating to 3.2 million ounces, from the shipwreck SS Gairsoppa. This silver has come to the fore but has not affected the price. Indeed news broke of the find when silver was near to its 19.14 lows, and since then the price has only risen. The arrangement that is in place is Odyssey gets to keep eighty per cent of the value of the find, whilst the British government takes twenty per cent, since it was their silver in the first place! It will be interesting to see if any news of the actual sale moves silver prices in a dramatic way or not.

As an alternative to gold in the investment and inflation hedging markets, silver is also facing similar fundamental news to gold, namely the Federal Reserve’s outlook for its interest rate and quantitative easing programs. As it is a more volatile commodity, even in spite of its much lower price, it could well move swiftly in either direction depending on the news flow that comes from the US.

Looking ahead, if silver regains the channel support, which has moved to 24.18, then there could be a retracement to recent highs. Many are calling for a return to 50.00 or more, but it is very rare for silver to trade at those levels. Silver gave up much of its gains very quickly whilst gold, making a less dramatic high, gave up its gains a little less rapidly.