Another Bullish Argument for Metals?

by Ashraf Laidi
May 6, 2011 23:09 | 15 Comments

This headline-charged first week of May has been dominated by the announced death of Osama Bin Laden, a historic 5-cent retreat in the euro and the greatest weekly decline in silver. But the week could have witnessed a positive transition (another one) in favour of precious metals. Here is why;


The selloff in metals was initiated by a knee-jerk reaction to Osama Bin Laden's death on the argument that the safe haven trade in favour of precious metals may no longer valid. The gold and silver sell-off were limited to 5%, before a modest rebound ensued in Monday Europe. But the main culprit to the metals selloff was the subsequent increases in silver margin requirements at the Comex, which accumulated an 84% increase in 2 weeks. Liquidation became the name of the game regardless of whether Boston Fed's Rosengren said USD weakness was not responsible for inflation or that further easing measures were not off the table.

Taking a step back, the monetary policy arguments for gold and against the USD remain the following:


i) FOMCs consistently dovish remarks regarding muted inflation;
ii) Fed's downgrading of growth and;
iii) Fed's planning to reinvest mortgage securities payments, which is a form of passive easing as the balance sheet is prevented from shrinking. Externally, the USD remains challenged by the contrasting monetary policy picture involving a tighter ECB/BoE/RBA relative to the Feds continued quantitative easing. This remains the yield differential driver to USD weakness. Any periodic reverberations regarding peripheral Eurozone debt concerns, equity market pullbacks disappointing earnings have proven -- and will likely to continue proving an opportunity for buying the dips in EURUSD, AUDUSD, gold and silver.

It will take the removal of the aforementioned fundamental dynamics in order for the USD to mount any credible rebound of more than 5% ie above 75 for at least 3-4 weeks. Such a strict requirement is necessary in order to avoid the several short-lived rebounds in the US currency, such as those seen in June 2009, August 2010 and February 2011.

Another Bullish Argument for Metals? - Charts Gold Weekly Uptrend May 3 (Chart 1)


Another Bullish Argument for Metals? - Gold Spec Vs Price May 5 (Chart 2)


Euro Arguments for Metals?

Sentiment remains the biggest tipping point in FX markets. Everything else is mere details. Todays rumours that Greece is considering exiting from the Eurozone amplified damage on an already falling single euro. The rumour, circulated by Germanys Spiegel added that Eurozone finance ministers held and European Commission were holding secret crisis meeting in Luxembourg on Fri. If these rumours bear weight and EU officials start discussing Greece publicly into the rest of the month, FX traders could begin to change their thinking away from the EUR. This could be especially magnified if sentiment begins emphasizing the end of QE2 story, which we do not consider to be swift. (The Fed will continue to reinvest maturing mortgage bond payments, thereby the purchases will not be terminated drastically).

In the event that "Greece" and "Euro Exit" become part of the conversation, gold and silver could find their safehaven allureonly this time it would be on the back of Eurozone debt concerns as opposed to QE3-bound Fed policy. It was exactly one year ago (the day of the Flash Crash) that Angela Merkel rocked the euro and risk markets by announcing Germanys crackdown on naked shorting of CDS. Very few media outlets have discussed this part of the Flash Crash. But such was a key development was responsible in another 10% slide in EURUSD into early June. A year later, Greece could be back on the table to the favour of rising USD, gold and at the expense of euro. The argument seems all too possible, but many dynamics continue to stand in the way of USD. This only enhances the outlook for gold and silver.

So far, EU officials swiftly denied such meeting but the euro continued to fall. Two weeks ago, the euro was unruffled by all sorts of negative news such as Portugals bailout, no confidence votes and revelations of deeper than expected haircuts on private bonds. But Thursday's ECB press conference seemed to have made all the difference when JC Trichet happened to omit the vigilance phrase in describing the banks focus on inflation. The resulting selloff was interpreted by the usually over-positioned FX market as a change in direction in the ECBs monetary policy. That is far from the truth. Trichet did NOT abandon the phrase of closely watching inflation. Instead, he resorted to the occasional omission of vigilance, which tends to be brought back when it is time for hawkish rhetoric and actual tightening. As you read this piece, you realize the rhetorical and policy tools available to the ECB for hawkish and dovishness without uttering the word euro.

We warned in our Premium Piece in today's Intermarket Insights this week's euro close below the $1.45 may have potentially negative implications due to the break below the January trendine support. Tune in for the interplay between the dovish Fed & the increasingly restless Eurozone See chart


Comments (Showing latest 10 of 15) View All Comments
Woodster
North Vancouver, Canada
Posts: 2
3 years ago
Sep 16, 2011 5:54
Three years ago I told a young man who was an assistant manager of a major food market chain, I instructed the young man to buy as much silver mint coins he could afford. He bought 40 mint silver coins at $ 11.70 cn for each coin. As of today the spot price was $ 39.88 per coin. Not a bad return for his first investment in mint silver coins. Since his first investment he continues on a weekly basis to stock pile away more coins amounting to hundreds of coins into his banks safety deposit box and is well on his way to having at a minum something of value to barter with should times turn to the very worst. Remember....Silver is real money...not paper.
jw
toronto, Canada
Posts: 6
3 years ago
Jun 10, 2011 15:24
Bank of America = Worth less than toilet paper.

While BOA continues its collapsed you would think that metals prices would go up?

We no longer have true markets we have 21st century artifical markets.

In fact, Im going to start a brokerage firm called Artifical Markets ( AMFX)
jw
toronto, Canada
Posts: 6
3 years ago
Jun 9, 2011 14:04
If the securities dealers need to push the price of silver down to 20$ an ounce just to make delivery, than they will do so by using paper option contracts to control the markets. The free markets that once existed are no more. The markets now move in the best interest of the big banks and private institutions.

Think about it....While silver was about to reach 50$ an ounce and confirmed a technical uptrend. They collapsed it.
fxretracer
New Mexico, United States
Posts: 7
4 years ago
May 20, 2011 18:10
You know me Ashraif, I dont comment often...but when I do it usually counts: I agree with this article for the most part, but May is not over and I dont think we will see any new highs in Gold before Fall.
DaveO
N.Cornwall, UK
Posts: 5733
4 years ago
May 9, 2011 21:00
@catOnip, Thanks, I will catch up with you on that one
DaveO
N.Cornwall, UK
Posts: 5733
4 years ago
May 9, 2011 20:56
Its only recently that silver trading has become rather popular as normally its kinda the imbecile brother of gold. You would be better advised to study gold. Buy Ashraf's book and google gold trading for more than you could read in a lifetime. I am tech trader so to me all charts are much the same from an analysis perspective.
Hocac
Cracow/Leuven, Poland
Posts: 2
4 years ago
May 9, 2011 18:47
@Dave0. Thank you for your answer. Is there tho a good source of info on trading silver that you would recommend ?
DaveO
UK
Posted Anonymously
4 years ago
May 9, 2011 17:53
@Hocac. you could research in the forum which is what it's there for. Its not very good for novice traders but I assume you have done much study and reading before attempting to trade silver. gl and gt.
Saka
China
Posted Anonymously
4 years ago
May 9, 2011 16:44
I have longed ej March when G7 intervention, but quited last thursday. I should have longed aj, aussie does have much stronger fundamental.
Hocac
Cracow/Leuven, Poland
Posts: 2
4 years ago
May 9, 2011 16:07
Hello Cat0nip, DaveO and Qiman, I have been trading silver for a while, well, less than 3 weeks though I was impressed by the gains that I was able to make in a short time, I had my account wiped out due to that sudden move which I don't know how I could have anticipated it, I thought I was following the trend and that we were heading back to 50. Anyhow, I was wondering if I could get in touch with you on skype or some messenger.

Cheers