Hawaii Six O - Gary Wagner
A perfect storm of positive data moves gold sharply lower
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There were multiple factors which influenced pricing taking the precious yellow metal sharply lower. Concurrently the industrial component of silver allowed it to actually gain respectably on the day.
First to gold. The factors that have been the greatest influencers have been first dollar strength. Second and possibly most important is the fact that U.S. equities are running hot to all-time highs which brings in liquidity theory. While the purest definition of this theory was developed by J.M Keynes, who said that, “According to this theory, the rate of interest is the payment for parting with liquidity.” Liquidity refers to the convenience of holding cash. Everyone in this world likes to have money with him for a number of purposes. This constitutes his demand for money to hold.
However, a more common reference simply means that investors will put their investment dollars in asset classes that they believe will have the best performance. This does come with a caveat and that is, The more quickly an asset is converted into money the more liquid it is said to be.
According to Investopedia, “Liquidity Preference Theory is a model that suggests that an investor should demand a higher interest rate or premium on securities with long-term maturities that carry greater risk because, all other factors being equal, investors prefer cash or other highly liquid holdings. This theory also suggests that market participants work diligently to obtain progressively higher premiums as they invest in medium and long-term securities as opposed to short-term marketplace.”
The third variable which has been moving both lower is that recently U.S. Treasury yields have been moving higher which means that as a fixed income they offer a greater return. Treasuries are considered to be in direct competition to gold. Today the 10-year treasury note yielded 1.283% after reaching a high of 1.33%.
The Federal Reserve released its January minutes which indicated that many committee members have seen an increase in downward risks to employment as well as inflation. This was followed by today’s data with retail sales up 5.3% in January, this is the largest spike in the last eight months and occurs concurrently with industrial production which rose 0.9%.
Lastly on a technical basis today the 50-day moving average (short term momentum indicator) crossed below the 200-day moving average (long term momentum indicator). On a technical basis this could be signaling lower prices for gold in the future.
Many of the reasons that have taken both to lower pricing have been exactly the reasons that we have seen silver perform so eloquently. Silver futures basis the most active March 2021 contract gained $0.12 today a total of.44%, and is currently fixed at $27.445. Silver has had the advantage of being highly used in industry and with the current strong economic recovery could vote very well due to the increased demand for electronics and the development of solar panels. As such it is quite possible that we will continue to see not only silver outperform gold but beginning to move in opposite directions.
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Wishing you as always, good trading,