Dollar down, equities down, gold up, silver up more

(April 29, 2016 - by Lawrie Williams - Sharps Pixley)

There was something of an overnight melt-up in gold, and even more so in silver, which started in after-hours trade in New York, and continued in Asia.  The SGE am gold fix came in at CNY 265.25 per gram and the pm level was CNY 265.54/gram – respectively around $1,273 and $1,275 an ounce and later trade around Asian closing and European opening saw it touch $1,280 before slipping back a few dollars at the time of writing.

Silver continued its recent pattern of moving up faster than gold in percentage terms with the Gold:Silver ratio coming down below 72 – it was hovering around 83 only just over a month ago.  It reached a spot price high of around $17.90 an ounce before it too lost a little ground as European markets opened.

The rise may have been triggered by something of a late sell-off in general equities in the U.S., which continued with Asian markets down sharply overnight, and European bourses opening lower.  The dollar index was also a little lower in continuing fall-out from the Bank of Japan decision not to increase stimulus, and a no-change U.S. Fed position.  There were also some disappointing economic data out of the U.S. with the Q1 advance GDP figure coming in at only 0.5% up year on year, which was below market expectations. 

The latest gold price move, if it is sustained, will be yet another blow to the Goldman Sachs call in February to sell gold short.  In retrospect very bad timing by the GS analysts. Indeed, one might consider gold’s performance since that mid-February call doubly remarkable given Goldman’s clout in the financial sector.  At the time of the short gold call it was trading just below $1,240 and indeed did fall back sharply by around $30 in the couple of days following before making something of a recovery.  The current price, near $1,280 puts it close to Goldman’s stop loss level and if momentum is sustained then this could be reached which would certainly be a blow to the investment bank’s perceived infallibility.

Where Goldman has gone wrong is that it had assumed the U.S. Fed would be well into its rising interest rate program by now with a second increase in place and another couple due.  But currently the consensus among financial analysts in the U.S. is that a second Fed rate rise is unlikely before September at the earliest, if then.  One suspects that the Fed, as last year with its initial increase, may bounce itself into a second rate increase late in the year if only to try and retain some credibility in its forecasting, whether such a rise is truly justifiable or not.

What may be going in Goldman’s favor yet though is that May is now only a couple of days away, and in most years gold tends to weaken May to September – although not always.  It should thus also be remembered that in 2011 when gold hit its plus $1900 peak, it strengthened hugely through June, July and August.  Are we in for a repeat?  At the moment the force is with gold – and even more so with silver.  That can turn around rapidly, of course, but a close above $1,275 this weekend could be taken as a signal of higher moves into the beginning of May – particularly if there is continuing nervousness in general equities.