Starting and June and through the beginning of September, gold and silver prices were back in bullish mode. Gold rose to its highest price since 2013 and silver to its peak since 2016. The nearby gold futures contract traded up to a high at just under $1560 per ounce. Silver peaked at just under $19.54.
Markets rarely move in a straight line, and corrections can be healthy for bull markets. A price retracement cleans out stale long positions and creates an environment that brings in new buyers. Some market analysts and traders believe that the two precious metals will experience a deeper correction, and lower prices are on the horizon. I believe that any price weakness in the gold and silver markets will turn out to be a buying opportunity. I remain bullish on the two metals that are the world’s oldest forms of currency. Gold and silver are means of exchange that have been around a lot longer than any of the legal tender in circulation around the world today.
Gold and silver correct at the end of Q3
Gold and silver prices hit highs in early September, and both corrected over the past month.
The daily of December COMEX gold futures highlights the corrective move that took the price of the yellow metal from a high at $1566.20 on September 2 to a low at $1465 on October 1. The decline of 6.5% took the price to just below the midpoint of the breakout point at $1377.50 to the early September high. December futures settled at $1512.90 per ounce on Friday, October 4, a rise of 3.3% from the October 1 low.
The daily chart of December COMEX silver futures illustrates the decline from $19.75 per ounce on September 4 to a low at $16.94 on October 1. The over 14% decline was a reminder that the silver market tends to be far more volatile than the gold market. December silver futures settled at $17.625 on October 4, a little over 4% above the October 1 low.
I continue to believe that more gains are on the horizon for the gold and silver markets.
Reason 1: Rates are heading lower
The US Fed has already cut the short-term Fed Funds rate by 50 basis points since July 31. At the same time, the central bank ended its balance sheet normalization program that had been pushing rates higher further out along the yield curve. Concerns over the global economy are likely to keep the downward pressure on US rates. At the end of last week, market consensus continued to favor another two 25 basis point declines in the Fed Funds rate by the end of 2019.
The daily chart of the 30-Year Treasury Bond futures contract in the US shows that the long bond has moved from 157-17 on September 13 to a high at 165-03 on October 4. Rates are falling along the yield curve in the US.
At its September meeting, the European Central Bank cut the deposit rate by ten basis points to a new low at negative 50 points. The ECB also announced that they will begin purchasing high-quality debt securities to the tune of 20 billion euros per month starting in November. A new QE program will push rates lower in an attempt to stimulate the sluggish European economy.
Falling interest rates in the US, Europe, and around the world makes gold and silver more attractive as stores of wealth compared to fixed-income instruments. The trend in interest rates is bullish for the prices of precious metals.
Reason 2: Brexit is a mess
Gold and silver rose to their previous medium-term peaks in July 2016 in the aftermath of the Brexit referendum. Gold traded to $1377.50 and silver to $21.095 per ounce.
The deadline for Brexit is on October 31. The Parliament ruled that Prime Minister Boris Johnson must ask the EU for an extension if he cannot agree on a deal for the exit at the end of the month. The odds of an agreement are low. The next event is likely to be a general election, which will stand as a second referendum for Brexit. At the same time, the Brexit Party in the UK emerged victorious at the recent elections for MPs to the European Parliament. The leader of the new political party, Nigel Farage, will have an influential role in the next general election and could emerge as a kingmaker. He has offered support to Prime Minister Johnson only if he replaces current Tory MPs who have not backed a hard Brexit. Additionally, the current leader must pledge to take the UK out of the EU without any deal. The Prime Minister has rejected the offer.
The uncertainty surrounding the future of the UK and EU could cause more than a little volatility in markets across all asset classes and is supportive of the prices of precious metals. Gold and silver are safe havens during times of uncertainty.
Reason 3: US politics
The US is a politically divided nation. The US House of Representatives has started an impeachment inquiry to remove President Trump from office. At the same time, the 2020 election campaigns are now in full swing. While President Trump is standing for re-election, the Democrats have three leading candidates to challenge the sitting President. Former Vice President Joe Biden’s lead in the polls has slipped, and Senator Elizabeth Warren moved into first place by a couple of percentage points. Senator Warren and Senator Bernie Sanders represent the progressive wing of the party. Both have pledged to expand social programs and address the wealth gulf within the country through policy moves.
Meanwhile, last week, Senator Sanders was hospitalized for heart-related problems. If he were to step aside, his supporters would likely flock to Senator Warren. At this point, a combination of the two Senators’ support would likely dispatch Joe Biden and set the stage for a progressive challenge to President Trump.
In a recent interview on CNBC, famed hedge fund manager Leon Cooperman said that a Warren victory could knock as much as 25% off of the value of the stock market. The uncertainty of the US political landscape over the coming years will add to uncertainty in markets, which is supportive of precious metals prices.
Reason 4: Currencies are losing value
Central banks around the world continue to be net buyers of gold. China and Russia have vacuumed in all domestic output to build reserves, and that trend is likely to continue. At the same time, both countries and others have purchased the yellow metal. The official sector is adding to gold reserves.
Gold is a reserve asset for central banks around the globe. The IMF and governments consider gold a foreign exchange asset. During the most recent rally, the price of gold in most currencies around the world rose to record highs. In Q3, gold in euro terms put in an all-time high. The only currencies where the yellow metal did not rise to a record level in the third quarter were in the US dollar and Swiss franc terms. However, the price rose in both of the currencies.
The bull market in gold began in the early 2000s, and the move since June was another leg to the upside in a long-term trend. The rise of gold is a symptom of the declining value of fiat currencies. The bottom line is that record-low interest rates and accommodative central bank policies have depressed the value of all foreign exchange instruments. Since rates are heading lower, the trend of currency devaluation is likely to continue.
Gold is a currency, and while central banks can print legal tender to their heart’s content, they cannot create more gold. Throughout history, gold has been like banknotes and silver the change in our pockets. Central banks continue to hold gold, and that is the reason why the yellow metal should continue to appreciate and take silver along for the bullish ride.
I view the recent correction in the gold and silver markets as another buying opportunity. Both markets can be volatile and could fall to even lower levels before turning higher again. However, any further selling would only make the value proposition for both metals more attractive.
View original article with charts here.
Andy Hecht covers Commodities and Forex as one of the original contributing analysts at FATRADER.com. A former senior trader at one of the world’s leading commodities trading houses, Philipp Brothers (now part of Citigroup), Andy has worked and consulted for banks, hedge funds, and commodities producers and consumers around the world for over 35 years.