Gold & Silver Face the Fed

by Ashraf Laidi
Mar 2, 2012 16:34 | 11 Comments
Silver is up three times as much as gold so far this year; +26% YTD, versus +9% for gold. This is starting to look like 2010 when silver rose 80% vs. 28% for gold. The 2011 damage in silver was primarily caused by the near-quadrupling of margin requirements from the CME, causing a 10% decline in silver in contrast to a 10% rally for gold. While both metals are due for one more leg down, silver is expected to maintain its oupterformance relative to gold, bringing the gold/silver ratio down to the high 30s from the current 48.

Gone are the days when metals used to rally on sovereign debt woes alone. Central bank asset purchases have taken over as the more consistent fundamental catalyst to trend shifts in gold and silver. The money/yield substitution notion by gold has been behind the 17% and 43% rally in gold and silver from the week of the LTRO-1 (December 20, 2012). The subsequent week was also accompanied by certainty of at least 50 bln in asset purchases from the BoE and Yen 10 trillion from the Bank of Japan.

Bernankes Wednesday remarks dampening the possibility of further Fed stimulus emerged via a reference to inflationary pressures rather than an acknowledgement of improved economic performance. Expectations of QE3 by the Fed have become part and parcel with a falling US dollar, rising euro and rallying commodities. Any blow to those expectations hampers the current uptrend in risk assets.

Looking ahead, bond vigilantes will scrutinize the inflation and growth implications of upcoming data, which could provide the next dose of upward momentum for bond yields. The combination of prolonged strength in energy prices and continued improvement on the US labour market front would be sufficient in raising interest rate expectations, causing the rest of FOMC members to potentially reconsider their future speeches regarding the recently extended zero rate policy. This would cast a pall on metals, to the benefit of the USD.

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Gold & Silver Face the Fed - Gold Silver Mar 2 (Chart 1)

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Gold & Silver Face the Fed - Goldsilver Ratio Mar 2 (Chart 2)

Implications for gold, silver

Gold remains supported by a confluence of two major moving averages (100 and 200 daily moving averages at 1692 and 1675 respectively). These are considered immediate support levels, which could well be tested on the next profit-taking bout in equity indices. Long-term gold investors ought to keep a check on 1620s, which remains the long term trend-line support extending from the lows of September 2008. As long as this level survives prolonged deleveraging, fresh buying will likely lift the metal back towards the 1800s. A resurfacing of sovereign debt woes combined and renewed central bank easing policies stands as the likeliest fundamental catalyst.

Silver investors may have finished licking their wounds from last years quadruple hike of margin requirements from the CME, which dragged the metal by 10%by end of 2011. Removing that intervention from the authorities, the situation would not have been as dire for the metal, considering that the fundamentals for commodities have improved due to stabilization in the BRICS. Technically, silvers weekly chart failed to cross its April trendline resistance, which coincided with failing the 55-week MA. As long as it holds above $29, silver is likely to regain the $42-$42 territory. Any decline below $29 risks extending losses towards 26, which denotes the last defending foundation for the 4-year uptrend. Considering silvers exposure to industrial demand relative to gold, the perfect storm would be prolonged LTRO & QE from the ECB/BoE and continued pick-up in EM demand for commodities.

Our readers were warned back in December of the potential decline in the gold/silver ratio, when it stood at 54.

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Comments (Showing latest 8 of 11) View All Comments
Gomel`, Belarus
Posts: 4
10 years ago
Aug 14, 2012 11:28
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Frankfurt, Germany
Posts: 1632
11 years ago
Jun 6, 2012 11:56
Problem is Ezone is all politics, not economy. From the great depression 1930 it should be well known austerity only worsens the economical downturn. But Merkel ignored this lesson. Now Ezone has entered recession and merkel has 2 options: succumb to Hollande and pay for growth - starting with bank bailout w/o banks recapitalized no economical growth - but keep Euro alive. The estimated cost 700 bln. Or, option 2, leave Euro . Then the cost is estimated 1 trn. At least. Thus what I wrote more than a year ago, if one wants growth and keep Euro there is no way , politics must first focus on Ezone economy ( no not national economies ) , then Ezone common treasury ( what is now called fiscal union ) , issue Eurobonds, and then leave the Euro to the one Ezone treasury and the ECB. Politics get out of currencies!
The economical effect however is that more than 20.000 politicians are obsolete, and more than 5 million govt officials are obsolete. Thus the reasonable, the simple, the computable will not happen.
manchester, UK
Posts: 1763
11 years ago
Jun 6, 2012 11:08
no idea on qe3, but read a lot of things about german should pay.
Frankfurt, Germany
Posts: 1632
11 years ago
Jun 6, 2012 7:43
It is not a done deal the FED continues operation twist . Bernanke ( and Obama) tossed the ball
in the Ezone yard some weeks ago.
Ashraf Laidi
London, UK
Posts: 0
11 years ago
Jun 6, 2012 1:03

This article was correct in predicting the metals' decline but not the move in Gold/Silver ratio.
As for why is gold rising, here is what we told our paid subscribers on Monday.

" Gold's sharp rebound largely reflects the weakness of the US jobs report, which is deemed a powerful confirmation for further asset purchases by the Federal Reserve. Such reflexive moves disregard the possibility that any quantitative easing from the Fed will be sterilized by sales on the shorter-maturity notes, regardless of whether MBS or US treasuries are purchased on the long end.

Thursday's Chicago PMI hit its lowest level since October 2009 at 52.7 in May, from last months 56.2. The index has fallen by 10 points in 2 months, pushing its New Orders sub-index to the lowest since September 2009. Looking at our charts, the common denominator in all graphs, is the lower highs formation, whereby each series attempts to regain its 2010/2011 highs but fails half way. "

For detailed look on the above , subscribers to the Intermarket Insights can have full access in Monday's piece.

Non subscribers can click her to join:


Ashraf Laidi
London, UK
Posts: 0
11 years ago
Jun 6, 2012 0:58
هناك إحتمال قوي سنرى 1250

Sydney, Australia
Posts: 1
11 years ago
Jun 5, 2012 13:46
Bonjour Ashraf,

It is with great interest that I read this post today and find it very topical as I am wondering if we are about to live another "Deja-vu" moment with gold & silver (on a crunched timeline hopefully?) and have the same situation that happened from December to March unfold in front of us?

I am sadly noticing that litterally straight after you published this post back in March both silver and gold tanked from a high to a low similar to the one at the end of 2011.

The Gold to silver ratio went from a low 48 back in March to the high 57 at the moment (very similar to the high back in December 2011).

I would love to get your opinion on what has happened in the last few days, where we finally have seen the price of gold going up, breaking above both the 20 & 50eMA, but currently falling short of breaking through the down trendline from Sep 2011 (sorry cannot attach a picture/chart and no silver option in the above chart! for the other readers).

With the global competitive devaluation and potential QE3, it is what some have refered to as a "race to the bottom" that I also believe will ultimately benefit gold and silver, I cannot but notice how silver is currently lagging behind gold... Opportunity? Would love to hear your thoughts (in French or English!)
jeedah, Saudi Arabia
Posts: 2
11 years ago
Jun 4, 2012 14:09

الهدف للذهب على المدى البعيد اخي اشرف ...ممكن
900او كم