Those who've caught the ride in precious metals should be locking in some profit, and those who've missed this rally shouldn't be alarmed, says Andy Waldock of Commodity & Derivative Advisors.
The gold and silver markets have been perking up lately, which happens to have coincided with the Fed's talk of removing stimulus from the domestic economy. Logically, talk of higher interest rates has spurred interest in portfolio re-allocation towards gold and silver as investors attempt to get a jump on the beginning of a structural shift towards inflation. The result of this is that gold has rallied about 11.5% year to date and silver is up nearly 20%. Much of this rally has been technical in nature, as the markets have moved beyond some key chart points. Technical levels are always important in short-term trading. However, the fundamentals suggest that this rally may be petering out.
First of all, the new Chairperson of the Federal Reserve Board, Janet Yellen, is widely considered to be dovish on rates. She is far more concerned with promoting an inflationary environment that floats all boats rather than allowing the economy to deflate much as Japan's has done for the last 25 years. Secondly, the Fed has openly stated that interest rates will remain near zero as long as unemployment stays above 6.5%. Furthermore, recent commentary clearly shows that the Fed is looking for alternative ways to measure economic growth and keep interest rates low even if the unemployment rate should dip below 6.5%. Finally, any research into the published unemployment rate yields enough divisive misinformation for any party in charge to spin the outcome in their desired direction. Therefore, rates will probably remain low for sometime, yet.
The major brokerage and trading houses are all well aware of the Fed's strategy as well as the many macroeconomic issues that go into forecasting their annual price predictions for different asset classes. The result of most of their analyses points to a gold price between $1,141 and just shy of $1,300 for 2014. Deutsche Bank provided the low end while HSBC is the most bullish. The average for the group is just over $1,200. This range of prices seems at odds with the market currently trading around $1,340.
The gold and silver markets have both drifted lower for the last three years. Gold's inability to break through $1,800 per ounce in October of 2012 created a triple top of resistance that sent the market below $1,200 per ounce with silver following suit down to $19 per ounce. The recent rally in these markets has been fueled by the basing pattern they've formed and their inability to penetrate the lows they made on their initial sell-off last June. Key resistance for gold is now very close at $1,360 and $22.70 in silver.
Finally, commercial traders in both gold and silver have become more bearish with each weekly gain. Commercial traders in silver have more than doubled their net short positions in the last two weeks. Their recent selling makes them net short nearly 33k contracts. The last time the commercial traders were this short in the silver market was February of last year, which preceded a decline of more than 35% over the next four months. Meanwhile in the gold market, commercial traders have been net sellers in each of the last eight weeks and are very close to passing the net short level they hit last November.
I remain a long-term bull in the precious metals markets. Eventually, rates will rise and capital will tighten; now is not that time. The Fed remains dovish, rates remain low, and the global economy and emerging markets remain tame. The result of all of this is that the recent run up in the precious metals should be viewed as a trading opportunity. Those who've caught the ride should be locking in some profit. Those who've missed this one shouldn't be alarmed. We'll look to take the short side of these markets over the next few weeks and be prepared to buy in for the long-term at a lower price.
By Andy Waldock, Founder, Commodity & Derivative Advisors
