Negative momentum for the precious metals carried over into Wednesday, as gold prices tumbled below $1,280 per ounce in early trading. Spot silver was down 0.4% this morning to $16.93/oz. Palladium fell by about 0.5% while platinum posted the steepest losses, sinking almost 1.2%.
The dollar was up only slightly to 93.6 on the DXY index on Wednesday morning, so dollar strength is having only a minor effect on the precious metals. The stronger impetus seems to be a general risk-on sentiment among investors who continue to jump into stocks and higher-yielding assets as we enter the fourth quarter of the year.
The rally for equities has proven resilient even as one pundit after another can offer little explanation for why the market gains are rational or justified. Stock futures in the U.S. pointed higher again after the Dow Jones Industrial Average briefly crossed the 23,000 mark for the first time ever on Tuesday. The index closed just shy of this all-time high.
The Dow, which only includes the stocks of 30 of the largest companies, has been running ahead of the broader markets. This indicates that the gains are concentrated at the top of the Wall St food chain, suggesting poor market breadth. In other words, the overall march higher for stock indices has not been evenly distributed, with only a handful of large firms accounting for the lion's share of the movement higher.
This supports the notion that many investors—especially the large institutional investors—are chasing short-term gains by piling into stocks as the market tops. This, of course, defies the wisdom of not following the herd when investing. Quoting the well-known fund manager Barton Biggs, Warren Buffett has described this phenomenon with a telling comparison: "A bull market is like sex: It feels best just before it ends." The current bull market in stocks is more than eight years in the making, which is a relatively long time for any market to climb higher without a correction.
The leading economic news in the U.S. on Wednesday was the sharp 4.7% decline for housing starts during the month of September. This measures the pace at which new homes are constructed. This represented the biggest one-month drop in housing starts since at least April.
The drop in gold prices is likely being cheered on in India, where Hindus, Jains, and Sikhs will celebrate the Dhanteras holiday tomorrow, the beginning of the Diwali Festival. The holiday is seen as a particularly auspicious time to buy gold or give the precious metal as a gift, so the typical surge in gold demand associated with Diwali will likely be augmented by the dip in prices.
Perhaps overlooked in the geopolitical discussions about North Korea and ISIS is the possible sea changes that elections overseas could have on the global landscape. Germany's recent elections are challenging the agenda of Chancellor Angela Merkel while Japan is also holding upcoming snap elections of its own. Meanwhile, the Communist Party Congress is being held in China, a major political event that occurs only once every five years.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.