Gold: Low Interest Rates And Fear
2015 is getting off to a golden start.
Divergence - Gold rallies in all currencies.
Silver providing positive signals.
Interest rates and fear favor the yellow metal.
On Thursday, January 8, the dollar index made a new high at 92.76. This was a significant event. The dollar traded above the November 2005 highs - it broke through old resistance at 92.53.
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The rally in the dollar, which began in early May 2014, has brought the greenback from under 80 to its current level. While the move has been nothing short of spectacular, it has been slow and steady. Daily historical volatility in the dollar index is running at under 6%; there have been few price spikes. The move in the dollar is not only technical but fundamental as well. A strong U.S. economy and the prospect for rising short-term interest rates compared to weakness in Europe and the prospect for stagnant or lower interest rates bodes well for a continuation of the rally into 2015. Generally, a strong dollar has led to weaker precious metals prices on a historical basis. However, this year things may be shaping up differently.
2015 is getting off to a golden start
After finishing 2014 at $1184.10 per ounce, gold has moved higher over the first six trading sessions of the New Year. Gold closed on Friday, January 9 at $1223.40 - an increase of over 3.3% in the first days of 2015. Gold was down 4.4% in 2014 - it was a lackluster year for the metal. Considering that the dollar rallied by 11.97% in 2014, the performance by gold was strong. Add to the mix that other commodity prices plunged during the year that just ended. NYMEX crude oil fell over 43%, iron ore prices plummeted, copper was down almost 16% and gold's little brother silver lost almost 23% on the year. All this adds up to a good year for gold, even though its value was trimmed.
The price of crude oil has continued to slide in 2015, so far this year the commodity has lost another 9.22%. At the same time, gold has posted gains, making one wonder whether we are in for a golden 2015.
Divergence - Gold rallies in all currencies
As the greenback made new highs, the price of gold has been moving higher. With strength in the dollar, gold is moving higher in all currencies - particularly in euro terms, as the euro has weakened by over 2.1% in 2015. A stronger gold price thus far in 2015 is across the board with the yellow metal posting gains in all currencies. Historically, the best gold rallies come during periods when it moves higher against all major currencies around the world.
Gold is both a commodity and a financial asset. In times of fear and trouble a flight to quality often translates into gold buying by investors and speculators. Interestingly enough, given the current state of world affairs and the strength in the U.S. economy, a flight to quality in 2015 could send buyers into both gold and the U.S. dollar - at the same time. Recent terrorist activity in Europe has only made a bad economic situation worse for the continent that has been economically under siege. A rising nationalistic movement could spread across Europe in response to events in France this past week. Upcoming elections in Greece at the end of this month could spell trouble for the country's future in the euro and sow the seeds for a sovereign debt default. Greece will become the test case for other weak Southern European nations. The sanctions against Russia weigh heavily on Europe, traditionally Russia's biggest trading partner. All of this adds up to an environment where a flight to quality could make gold really shine this year despite a higher dollar.
Silver providing positive signals
Last year silver, gold's little brother and an industrial precious metal, lost 22.82% of its value. In many ways, silver led gold lower on the year. However, thus far we have seen a reversal of fortune in silver.
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Silver made lows of $14.155 per ounce on December 1 - just a little over one month ago. Since then the price of the metal is up 16.7% and it is up 5.9% so far in 2015. At the same time open interest, the total number of long and short positions, on COMEX silver futures is starting to rise. Rising price accompanied by rising open interest in futures contracts is often a bullish sign for a market.
Silver led gold lower in 2014, but so far in 2015 it is leading the yellow metal higher. Silver is providing a positive signal for the price of gold here and is validating a higher price.
Interest rates and fear favor the yellow metal
While precious metals are sensitive to moves in the dollar, simply judging them against moves in the greenback is simplistic. It may be more useful to look at commodities like gold and silver against interest rates. After all, precious metals are both financial and industrial commodities. As a financial, they must compete with other financial assets. When interest rates move higher, their luster tarnishes because the cost of carrying or holding precious metals increases for investors and speculators. It becomes a question of opportunity cost - gold and silver do not pay interest.
In a world where interest rates remain at historically low levels, the case for holding precious metals improves. In Europe, given the state of the economy and political landscape, the ECB will likely lower interest rates during 2015. At worst, they will remain the same. In the U.S. lower commodity prices will keep inflation way below the Fed's target levels. Additionally, fears of contagion from other weak economies around the world may hold the Fed's hands steady in terms of interest rates during this year. In either case, even if interest rates do rise in the U.S. in 2015, the move will be very mild and perhaps just symbolic in nature.
China has been battling slowing growth. The Chinese government has recently introduced a number of measures designed to stimulate the economy via lowering the cost of capital - lower interest rates. All of this adds up to a continuation of low global interest rates through 2015 and that bodes well for the prices of gold and silver. Add to the mix sky high equity prices that are vulnerable to a correction and increasing terrorist activity, the latest chapter in France, it is not hard to envision a scenario for bouts of flight to quality. Gold and silver have been hard assets, hard money for longer than any paper currency out there. Paper currencies have come and gone throughout the pages of history but gold and silver have been a constant.
The current environment of rising fear and low interest rates could be the perfect prescription for higher gold and silver prices in 2015. If the first six trading days of 2015 were any indication, we could be in for a very volatile year in precious metals with prices moving appreciably higher. |
