Gold and Silver Roaring Back

After a couple of weeks of declines, the S&P500 managed to eke out a small gain last week, rising less than 0.5%. Volume was very light. In fact, August volume is coming in at some of the lowest levels in the last decade. For all the talk of investors ‘rotating into stocks’ it seems that it’s just that—talk, The dismal volume figures suggest that people are not rushing back into stocks, when they sell their bond holdings. Instead, they’re just hiding out in cash. Volatility also barely changed, but at historically very low levels, levels still associated with a great degree of complacency.

The technicals are still painting a topping picture on the weekly charts. Upward momentum is stalling and lots of the internal indicators (eg. breadth signals) are still weakening. This means that increases in prices are being led by fewer and fewer stocks, while at the same time many other stocks are falling, often to new 52 week lows.

The daily charts, on the other hand, are pointing to the possibility of a short-term bounce. The modest price increases towards the end of last week may carry over into this week.

The big story for the markets continues to revolve around the Fed and its planned taper of perpetual QE. So the US economic data are influencing the markets in a perverse way. Any improvements in data are greeted with fear because economic improvements give the Fed more reason to go ahead and taper QE. This leads markets to sell off. On the other hand, any deterioration in data is greeted with cheers; bad data means more QE, and more QE means higher stock prices.

And last week’s macro data was mixed, which meshes well with the mixed results in the stock market—the S&P rose slightly but the Dow fell slightly. The Chicago Fed National Activity Index fell. This is a leading indicator and it continues to paint a picture of a slowing economy. Existing home sales beat expectations, but new home sales missed—-badly. Initial jobless claims rose more than expected. But both leading indicators and the Kansas City Fed Manufacturing Index beat consensus estimates.

After hitting a low of $1,182 in late June, gold has roared back to hit $1,400 last Friday. This is an 18% jump in less than two months. Silver’s snap back has been even more impressive. After touching $18.15 in June, silver climbed to well over $24 on Friday. This is a 32% spike.

What happened?

Despite all the pronouncements that the secular bull market in gold and silver has ended, it looks like this call may not be accurate. More and more evidence is supporting the argument that the paper price of gold was taken down (and silver follows) to allow entities that are ‘short’ the metal to get their hands on it to satisfy delivery requirements. But while the GLD did disgorge physical gold, the gambit appears to have failed as almost all other natural investors in gold actually accumulated the metal on the price drop. Strong evidence supporting the argument that the price was manipulated down rests with the major US metals exchanges which saw their inventories fall to dangerously low levels. If the price were truly market-driven, inventory would not evaporate……but it did.

So now, while some major ‘owners’ of gold, such as Germany (which is forced to wait seven years to regain possession of only a small portion its gold), are still missing their gold, the challenge to satisfy every gold owner who wants to take delivery just became that much greater. Instead of scaring owners of gold into selling their physical gold, the entities that engineered the recent price drop only served to create more demand for the metal.

The bottom line is that the price of gold is starting to return to levels more in sync with the actual physical supply of the metal. Since supply is tight, the price must rise.

And sure enough, the price is rising.

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