What the Heck Just
Happened to Gold and Precious Metals? by Brendan Conway
| June 20, 2014, 7:25 A.M. ET
Mr. Market rediscovered
gold and other precious metals on Thursday, resulting in
the metal’s biggest one-day rise in more than half a year.
It was the 14th biggest single-day move in the price of
the most popular gold ETF and a day that one trader termed
”frantic” for repositioning and short covering.
Okay, then. Why? Strategists are pointing
to the Federal Reserve and its decision this week to stand
pat on monetary policy. Not convinced? Neither are these
strategists very convinced — except when a few of them are
declaring that the market is growing increasingly skeptical
of the Fed. If skepticism’s the driver, then the turn toward
anti-Fed assets like gold would make more sense.
Commerzbank’s commodity strategists track
the buying activity to the futures market, which is where
a number of aggressive fund managers make their moves:
The price rally was evidently triggered
by Wednesday evening’s meeting of the US Federal Reserve,
despite it yielding no surprises: as anticipated, the
Fed scaled back its monthly bond purchasing programme
(QE) by a further $10 billion and adjusted its projections
only marginally. Fed Chair Janet Yellen merely reiterated
that interest rates will remain low for a considerable
period even after QE has come to an end. However, market
participants apparently saw this as good reason to buy
gold as well as silver on a grand scale. These were not
purchases of physical gold, however, but predominantly
transactions on the futures market. At over 245,000 and
a good 117,000 contracts respectively, gold and silver
contracts were traded at well above the average rate yesterday.
The Lindsey Group’s Peter Boockvar writes
this morning that he’s watching gold and TIPS as a baromoter
of the market’s view of the Fed’s credibility — and he reads
the Thursday trading as a note of doubt:
Because of my amazement and surprise that
the Fed didn’t alter one bit its comments on inflation
in their official statement, barely changed its PCE forecasts
and Janet Yellen referred to the recent higher inflation
data as ‘noise’, I felt it important to mention yesterday
morning that watching gold and inflation break evens were
the two key indicators to watch as I believe going forward
they will be a valid vote in giving their opinion on the
Fed’s credibility with their policy relative to the reality
of the data (in addition to the recent consumer price
data, the CRB index is a ½ pt from the highest since September
’12) . While it was just one day, gold certainly spoke
loud and clear on its thought of the new Fed forecasts
with its biggest one day percentage rally since September
and inflation break evens went up for a 3rd straight day
with the 5 yr implied inflation rate at the highest level
since May 2013. Based on this market response from both
asset classes, I’m declaring Janet Yellen’s honeymoon
as Federal Reserve Chair as officially over. This is not
because I expect an imminent revolt in inflation sensitive
markets to her inflation forecasts as this is always a
process but because yesterday was the 1st time in her
tenure that the market came out and blatantly disagreed
with her and the committee as I believe they correctly
should have. I expect this divergence to continue.
The market is a bit quieter
in early Friday trading. SPDR Gold Trust (GLD) and Market
Vectors Gold Miners ETF (GDX) are down 0.7% and 1.3%, respectively,
ahead of the regular session.
Direxion Daily Gold Miners Bear 3X Shares (DUST) and Direxion
Daily Gold Miners Bull 3X Shares (NUGT), the three-times
leveraged traders’ ETFs which moved more than 16% apiece
on Thursday, are moving in the range of 3% to 4%.
iShares Silver Trust (SLV), which jumped 4.6% on Thursday,
is off by 0.4%.
