Yesterday’s Price Action In Gold & Silver Prices Does Not Alter My Bullish Views (SLV, GLD, AGQ, ZSL)
Daily Capitalist: Here is a chart of the main silver ETF from yesterday. Not shown on the chart is today’s volume, nearly 100 million. This makes today’s volume in the iShares Silver Trust (NYSEArca:SLV) close to a record save for the frenzied trading last spring. Not shown, but similarly, the SPDR Gold Trust (NYSEArca:GLD) had much higher than average volume yesterday. The four precious metals fell hardest to least in proportion to which they are traded by the public in ETFs: silver fell the most, gold the next most; palladium (NYSEArca:PALL) – lightly traded- fell the least, somewhat less than platinum (NYSEArca:PPLT). (Note I show SLV above rather than GLD because its volume and price moves are more exaggerated than, but are similar to, GLD.)
Silver’s recent late December price bottom had minimal volume. It may have been an exhaustion bottom. There are other similarities to the summer of 2010, seen on the left side of the chart. There was also minimal volume in SLV, then the price of silver blasted off. The spike in volume you can see around $23/share marked a sell-off in the nascent uptrend. Except for dedicated gold (silver) sites, the trading public’s attention currently has been on one trading stock and on one pending IPO. Of course that’s an exaggeration, but I think there’s some truth to it..
What I think has happened is that after the Comex lowered margins on gold and silver several weeks ago, the trade became too one-way on the futures market. However, as volume charts of all the ETFs including the Sprott and Central Fund of Canada-related ones show, there was relatively low public participation in the recent bull move in the metals- overall, no major “over bullish” top is suggested as I see it.
Gold and silver remain in rising channels, and oil and copper yawned at the precious metals action- thus no major price deflationary trend a la last spring-late summer/fall is (as of now) suggested.
Could Ben Bernanke’s testimony yesterday suggesting- perhaps- a lesser willingness to “ease” have fundamental significance to gold/silver prices? I think not, at least not for quite some time:
Remember that gold moved up steadily from 2004 onward even as the Fed engaged in 13 straight interest rate increases, raising the Fed funds rate by 1/4 percent every meeting during that period. As may be the case now or soon, the private sector took over from the Fed as the provider of excess credit at “too low” an interest rate. With even the Vanguard tax-exempt long-term municipal bond fund (VWLTX) yielding a pitiful 2.46% annually on a yield to maturity basis (not a current yield basis, which is what standard sites such as Yahoo-Finance show), high quality interest rates up and down the duration spectrum are below the last twelve months’ CPI rate of about 3%. It is this sort of “negative rate” environment that in the prior decade, as in the 1970s, favors a rise in gold and silver prices. The absolute level of interest rates is not the point. It is whether the return from a high quality bond is adequate relative to inflation.
The main argument that I think would invalidate the above one would be if the price of gold were so high that a tsunami of increased mine output awaited the unwary investor at these prices. But that’s not even close to the case. Existing mine output is only creeping ahead, but these mines are depleting every year. As for new mines, Standard Chartered has argued that even given today’s cost structure, $2000/ounce is the minimum that would induce mining companies to develop a mine from greenfield to fruition, given companies’ requirements (they state) for at least a 20% internal rate of return from allocation of new capital. So perhaps current prices for gold and silver are too low.
As for Paul Krugman-type arguments, the action of the United States in 1971 and ever since indicate the the government of the U.S. does not consider gold a “barbarous relic”. President Nixon opted to keep our remaining gold and instead to abrogate our Bretton Woods commitment to exchange dollars for gold. And, the U.S. refuses to sell any of its gold (so it reports) despite today’s “high” price. Gold remains an agreed-upon monetary reserve. And silver trades over time with gold, though with more volatility.
Thus, without trying to time matters on a day-to-day basis, I see no reason after yesterday’s price action to alter my bullish views of the probable price future for gold and silver.
Related: ProShares Ultra Silver (NYSEArca:AGQ), ProShares UltraShort Silver (NYSEArca:ZSL).
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