Gold futures closed higher edging past the $1,600 mark Wednesday, extending their advance to a fourth session - perhaps traders considered prospects for further quantitative easing by the Federal Reserve and other central banks, including the Bank of England, the European Central Bank and the Bank of Japan.
Thursday Comex gold futures prices ended the U.S. day session near unchanged in subdued trading and today Gold edged up extending its winning streak to a sixth session as sluggish U.S. data boosted hopes for monetary easing.
With an agreement last weekend to bail out Spain’s struggling banks, Europe again avoided financial chaos but it still faces far bigger challenges that threaten the Continent and with it, the world economy, namely Greece, the tail that is wagging the dog. It’s the old “domino theory” that has European leaders up at night.
Greece, a country that represents less than 2% of the eurozone (in terms of GDP), prepares for elections in two days that could lead to its withdrawal from the eurozone with financial repercussions across the globe. According to the IMF, Greece’s gross domestic product will contract this year by 4.7 percent. The country is so dysfunctional that the employees who run the elections are threatening to strike if they are not given more pay. Things are quickly disintegrating in the country that gave the world the concept of democracy with incidents of violence and vigilantism. If you want to see how sad it is, watch this horrifying video of the televised debate among representatives of the seven Greek parties, including the neo Nazi “Golden Dawn” party. In Germany in the 1930s, economic hardships contributed to the rise of a murderous government in Germany and the death of democracy in Europe.
A lot of private money has already fled Greece, while its deeply depressed economy and dwindling tax revenues threaten to sink the country even deeper in the hole. Even if Greece elects a government willing to try to live up to the terms of its 130 billion-euro bailout deal, there are very strong doubts if Greece is capable of fulfilling its obligations. There are plenty of reports about how Greek citizens avoid paying taxes, retire at the age of 50 with full pensions and how fraud and corruption are endemic.
It is hard to calculate the costs if the new Greek government reneges on the bailout Greece negotiated with its European lenders a few months ago. Europe’s big fear is contagion — a virus of financial panic that could spread far beyond Greece. Spain’s leaders have long blamed Greece’s problems for having caused the conditions that helped undermine Spanish banks.
While waiting on the results of Greek elections let’s turn to this week’s technical part with the analysis of the silver market (charts courtesy by http://stockcharts.com.)
In the very long-term chart for silver, we see that the recent breakdown is being verified. Prices are below the rising support line and a noticeable change is seen this week in the upper part of the chart. The RSI level has moved close to the red horizontal line which indicated the confirmation of a breakdown in 2008.
Also, please take a look at the shape of the recent bottom and compare it to the major 2011 bottoms. Previous lows were immediately and sharply reversed, but this has not been the case this time. The breakdown is well-confirmed and along with the change in RSI level this week creates a situation which is quite similar to the period in 2008 which preceded the bigger part of the decline in prices. The technical picture for the white metal is worse than that of gold from a long-term technical perspective.
Let’s now have a look at the strength of silver relative to gold.
In the silver to gold ratio chart, we continue to see a clear confirmation of the breakdown below the long-term support line. Simply put, the outlook here is bearish.
Let’s move on to precious metals correlations and have a glance at our in-house developed tool that traces the intermarket dependencies.
The Correlation Matrix is a tool, which we have developed to analyze the impact of the currency markets and the general stock market upon the precious metals sector. No significant changes are seen this week. The traditional relationship of precious metals moving in the opposite direction of the USD Index remains in place. The general pattern of the metals moving in tune with stocks also continues, however to a smaller extent.
Gold prices are more closely linked to the currency markets than to stocks at this time. The bullish outlook for the USD Index therefore has bearish implications for the precious metals and is clearly the biggest threat to any rally in gold, silver, mining stocks or platinum prices at this time. The coefficients between gold and the general stock market deteriorated a bit this week. Our focus is and should remain on the currency markets.
Let us make one more remark that might be helpful in answering the title question – the correlation between silver and USD is stronger than between gold and USD (especially the 30- and 250-day correlations) which poses a greater threat on a silver investor, given that recent declines in the precious metals market are attributed mainly to the moves in dollar.
Summing up, even though the fundamental picture for silver and the long-term case are bullish, the technical situation for silver is quite bearish at this time and its medium-term picture is more bearish than gold’s.
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Thank you for reading. Have a great and profitable week!
P. Radomski
Editor
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