We can expect to see consolidation in the gold and silver markets today after the precious metals blasted off in yesterday's trading. The dollar was stronger in Tuesday morning trading, which should help drive the consolidation further.
While both the bulls and bears have been roiled by the whipsaw volatility of the two metals of late, the most ironic part of this week's volatile price action has been how quickly--and quietly--the market has reversed from Sunday's overnight fire sale. If you checked the spot prices before bed on Sunday and woke up late on Monday, you hardly would have noticed that anything happened at all.
After the prolonged slump for crude oil had some analysts and economists declaring that we were headed for $40/bbl oil, both price benchmarks rebounded on Monday, with WTI and Brent crude gaining 4.63% and 3.82%, respectively.
The turnaround in oil helped lift the precious metals, as gold and silver went on a tear. Gold bounced up from a 3-week low on Sunday night to a fresh 5-week high, while silver climbed to a 4-week high after sinking to a 5-year low. Stocks fell almost across the board, as only Japan's Nikkei 225 was able to track into the green.
Yesterday in the Markets
Monday's closing numbers:
Economic News Affecting Gold
Most movement in the markets followed the rally in crude oil, although U.S. stock indices were still well into the red despite a surge in energy stocks. The drag came from tech bellwether Apple, Inc., which sank on news that it is embroiled in a $1 billion lawsuit over monopolistic practices relating to the company's popular iPod line of audio player products. The litigation has drawn attention for placing late Apple CEO Steve Jobs at the center of the case, a development fraught with controversy and intrigue. Meanwhile, the S&P 500 saw its largest single-day loss in a month after sliding close to 0.7%.
With crude oil jumping, the dollar sank, losing ground against the pound, euro, and yen. The ruble also fell (yet again) while U.S. treasuries fell for the first time in 7 trading days, pushing the yield on 10-year T-notes up 5 basis points to 2.22%. The dollar did show renewed strength early on Tuesday, climbing to above 88.5 on the DXY spot index by 10 am.
Silver's steep rise from a bottom around $14.50 all the way up to $16.50 on Tuesday morning capped off the largest intraday move (in either direction) for the argent metal in 2 years. Sales of silver bullion from the U.S. Mint have been robust as we march toward the end of the year, indicating that physical demand for the metal picked up while prices remained low. Gold is seeing some safe haven buying in response to Moody's downgrading Japan's sovereign debt. Trading volumes in Asia have been heavy, continuing the trend seen over the past two years of physical gold flowing from west to east. The recovery in the gold price puts spot gold right around its 50-day moving average of $1,205. The sharp fall and subsequent rebound in gold and silver prices may indicate that current lows have been tested, forming new support levels for the two metals.
Geopolitical News Affecting Gold
Disappointing consumer spending on Black Friday and sluggish industrial activity from China and Europe seem to confirm that the global economy is mired in a slowdown from which it will simply have to take its lumps. The speculation, however, is that governments will respond with more monetary stimulus. Germany has been outspoken against the need for more quantitative easing, as the country's ECB council member, Jens Weidmann, spun the recent slide in oil prices as a de facto form of stimulus on its own. While German industrial output has been uneven in recent months, the country's DAX stock index has topped record highs on the back of 12 consecutive days of gains. Somewhat mirroring U.S. markets, it would seem the DAX is woefully overbought at the moment, as it currently sits about 7% above its previous 50-day moving average.
While the EU is already in the process of structuring purchases of asset-backed securities, and is even considering buying government debt from certain of its member nations, it now appears that China may be preparing its own stimulus package in order to give the recently-minted "world's largest economy" a jolt. The country's central bank already cut its benchmark rates on November 21, but many believe that the People's Republic is due for an injection of liquidity--especially after constructing a series of modern-looking "ghost towns" in order to boost the country's official GDP. The economic slowdown (and the various reactions from central banks, some of them ill-conceived) should spark some safe haven buying of precious metals, which will also be helped by India's removal of its unpopular 80:20 rule that required importers to re-export 20% of their gold in order to shrink the country's trade deficit. The plunge in oil prices have helped eat into that deficit on their own.
All eyes will remain fixed on the crude oil benchmarks, as a rift within OPEC over its decision last week to maintain its production levels appears to be widening. Saudi Arabia would like to use falling prices as a tool to shake out U.S. shale producers from the market, focusing on the long game rather than the immediate consequences of cheap oil. Other OPEC members are pushing for the oil-producing nations to cut output in order to drive prices back to more profitable levels; Venezuela has been the most vocal on this point, and has found allies in Tehran and Baghdad. The Saudis hold enormous sway within the organization, however, and are unlikely to change their strategy by shifting to near-term concerns. Many observers have characterized OPEC's recent inaction as a sign that the trade bloc is relinquishing its role as a "swing producer" in the global oil market, but the divide over cutting production may signal an even deeper shift in the cartel's role on the horizon.
If anyone is hoping that yesterday's resurgence in oil will be more than brief, it's Russia. Cheaper oil prices are hurting the Red Giant badly, adding a compounding effect to economic sanctions levied by the West. The Russian Economic Ministry revised its forecasts for next year, predicting that Russia will remain stuck in a recession. Authorities now project a 0.8% contraction of the economy after initial estimates called for about 1.2% growth. The news pulled the ruble back from its recent gains, as Monday saw the largest intraday loss for the currency in 16 years. The country's Finance Ministry cancelled its upcoming auction of treasury bonds on Wednesday amid fears that market conditions are unfavorable. Like other large emerging markets Turkey and Brazil, Russia has been dealing with high inflation, which is probably a bad sign when it coincides with more than a 30% crash in energy prices. At least in the case of Turkey, the yield on its government bonds is incredibly robust. Meanwhile, Russia can't seem to give away its sovereign debt.
A slew of economic data comes down the pipeline on Wednesday, including the all-important private sector payrolls report, last month's PMI Services Index, the ISM Non-Manufacturing Index, and the EIA Petroleum Status Report. After Fed Vice Chair Stanley Fischer reiterated yesterday in New York that the central bank's timing for raising benchmark rates will be "data-driven," Dallas Fed President Richard Fisher will be speaking in Dallas later tonight about Texas' economy and monetary policy.