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Global equity markets were almost weaker universally on Wednesday with Europe, Asia and the US all closing around 1% lower. The standout event was the US dollar losing ground sharply against all the major currencies as weaker US retail sales and a decline in producer prices were reported. Precious metal prices jumped by around 1% to new six month highs. The consensus view in the market place is now that the Federal Reserve will not raise rates before 2016.
I think the price action in the precious metals and the gold & silver sectors of global stock markets is also telling us that there could be more to the story than just a delayed rate hike by the Fed. What if the Fed deploys round 4 of another quantitative easing initiative?
Gold (in US dollars) has made a fresh six month high breaking upwards through overhead resistance. What is the golden canary in the coal mine telling us?
The big test in the weeks ahead will be whether gold can break up through long term downward resistance at around $1230/1220 and in doing so, confirm an end to the multi-year correction that began back in 2011 and a new upward phase in a bull market. We have increased our precious metal equity exposure across the major UK, Australian and Global Managed account portfolios to around 5%.
The big picture for gold can be seen. Prices have been descending in a wedge formation for a number of years, but downward momentum has clearly dissipated in recent times. A breakout from this formation would provide clear technical evidence that a new bull leg was underway and this would then set up a scenario where the spot gold price could challenge the old highs above $1800 next year.
For such a scenario to play out, I believe we would need a very strong catalyst in the form of further quantitative easing by the Federal Reserve. Whilst it is difficult to predict whether the Fed will definitively deploy QE4, the case is arguably growing by the day, and I believe this is now being reflected in US dollar weakness and corresponding precious metal strength.
What is good for gold is also good for the little brother, silver, which has also broken through near term overhead resistance to make fresh 6 month highs. I believe spot silver is now set to challenge the $17 level in the weeks ahead. Whilst silver has industrial applications it is also seen as a hard currency and is highly correlated with gold. In fact the correlation could be described as having a high beta to gold and therefore the recovery potential in the months ahead could possibly prove to be significant.
Silver producers have almost been totally discarded by investors this year and in recent weeks we have bought silver stocks Fresnillo in the UK and Coeur Mining in the US.
The US silver producers have been particularly weak this year with a record short interest position in most stocks. The short position (which is now entrenched after a five year bear market), is now more than 11% of the total float. If silver continues to rise it could trigger an explosive short covering rally.
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