We are gold and silver bugs and as such we are aware of the myriad of factors that affect the price movements in the precious metals sector. Today we will take a quick look at just one of them; The US Dollar.
2013 was a disastrous year for gold as it ended the year at around the $1200/oz. Gold started 2014 in good form rising to $1380/oz in March before falling back to $1240/oz and then it rallied again to $1340/oz. Since then it has declined to trade today at $1295/oz. So we can see that gold is up approximately 8% so far this year which is good progress, however, it is still 32% down its high of $1900/oz which it achieved in 2011. Silver prices and the gold producers, as represented by the Gold Bugs Index the HUI, also performed in a similar way to gold.
So we are now faced with the question of can gold maintain this level of progress in the second half of 2014 and finish at say $1400/oz plus or will this rally fade and bring about a re-test of the low of $1180 as some analysts are predicting? There are many ingredients that go into this mix but one of the most important elements is the performance of the US dollar, so we will take a quick look at just how it has been performing recently.
The US Dollar’s progress
Over the last two years the USD has tested the ‘79’ level on the US Dollar Index six times and the support has held, so what we thought was a Dead Cat Dollar is alive and still kicking. Taking a quick look at the chart below we can see that over the last three months the dollar has tested ‘79’ and then rallied to close today at 81.51, registering a gain of 3%.
There are a number of reasons for this rally; the first that springs to mind is the recent demise of the euro. The European Union is in all kinds of trouble on the employment front and so their political elite turn to the ECB for some help regarding the value of the euro. They believe that a lower euro would help to boost exports and thus more jobs will be created. The reality is that Germany would do well as the demand for a cheaper priced Mercedes would increase, but the rest of Europe would still be looking on in envy. However, the ECB did oblige by reducing their interest rate taking it into negative territory for the first time ever. This move makes it rather pointless to hold the euro as an investor would earn nothing and they are also saddled with the risk of a possible ‘bail-in’ which would see some of their funds being confiscated in order to support a delinquent bank. This flight from the euro weakens it and some of these funds will be parked in a dollar account thus driving up demand for the dollar.
The second possibility is that the dollar is reacting to the political turmoil that has intensified recently. The unrest is usually expected to boost the price of gold, however, funds can moved at the click of a button these days so maybe the dollar is that safety vehicle, at least for now.
Finally, there is the US monetary policy to consider, as of yesterday the tapering programme was in full swing with an expectation that it will wind up in the fall. No more QE is good for the dollar in that it stops the dilution process that was inherent in QE. It remains to be seen who is going to be buying treasury bonds when QE ends, but for now the dollar is spared.
US Monetary policy in the form of tapering is proving to be supportive of the USD, however, we would also draw your attention to the RSI which is now in the overbought zone, standing at 78, so we may see the dollar take a breather shortly.
Gold, Silver and the Mining Stocks
The turmoil in the world has gotten a lot worse of late in a number of locations as I am sure you are all aware. This kind of civil unrest and hostility brings fear into the markets and the precious metals sector usually finds itself in great demand. As a tiny sector of the market place it doesn’t take much of an increase in demand to drive prices a lot higher. Given the current state of the world one would have expected the price of gold to have moved a lot higher by now, but that simply isn’t the case. Gold looks to be fading, silver has rolled over and the HUI looks to have ran out of steam.
The spectre of tapering and the talk of interest rate increases cast a dark shadow over the precious metals area making it difficult to see just where the impetus for higher prices will come from. That said it will soon be Labour Day which heralds the start of the fall season which is normally good for gold.
The month of August will be an interesting one as it will give us an indication of which way this market is going. Should it fall significantly then we could be in for a re-test of the June 2013 lows of $1180/oz. We have always been a tad skeptical about this being the real bottom as it didn’t look like a final capitulation to us, although many of our peers are convinced that it is the bottom and signals the end of this bear phase.
I am a gold and silver bull, but not a perma-bull, as taking such a position is too rigid of an approach to adopt as far as investing is concerned, regardless of the market sector.
If you are convinced that the time is right for the precious metals to head higher then by all means acquire some physical gold and silver. The operative word is ‘physical’ that is having the metal in your own hands and not a piece of paper giving you ownership of it in a vault in some distant land. Our acquisitions were made early on in this bull market and for now at least we will not acquiring any more metal, neither will we be parting with it.
Our focus is now totally concentrated on the mining stocks and a few well thought out options trades, enabling us to trade both long and short, as and when the risk/reward scenario is skewed in our favour.
In terms of timing; the summer doldrums looked to have been by-passed, but the last few weeks has seen this sector start to rollover. It is currently heading south with room to fall further. The month of August could be the month that we hit a real bottom which would present us with some golden opportunities to acquire good quality mining stocks at bargain prices.
Some of the stocks we have in mind are already trading at one quarter of the prices they achieved in 2011 or even lower, so they are indeed very tempting at the moment. However, we must repeat that ‘cheap’ is not necessarily good value and a little more patience is still the order of the day.
We believe this is not the time to be fully invested in the precious metals sector and at the moment we are not prepared to adopt a cavalier approach to investment as we have been through a number of false dawns over the last few years, so we looking for more in the way of a sell-off before we can fully commit our funds.
The miners have started 2014 very well indeed on the back of rising gold prices, so the question is; is this the real deal or another head fake? Is the bottom really in? Could there be a final capitulation just ahead of us? Will the summer doldrums take the PMs lower?
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