QUICK READ: The U.S. stock market continued to climb anew this week, momentarily halting on Wednesday before pushing higher again on Friday. The precious metals tracked with equities, rebounding from recent lows on concerns over a global economic slowdown. With China cutting interest rates, Japan sliding into recession, and the European Central Bank considering all stimulus options, the outlook for the markets heading into 2015 remains rather unclear.
After trading mostly sideways in the five trading days previous, stocks pushed into the green on Tuesday. News of Halliburton’s takeover of oil giant Baker Hughes was initially taken as dovish for stocks, but skepticism that the $38 billion may sour subsequently divided market sentiment. If it is indeed finalized, the acquisition would bring the total amount paid in mergers this year involving U.S. companies to $1.5 trillion, the most in nearly 15 years.
Economic news from abroad had a considerable effect in the U.S. this week, as uncertainty from the Eurozone, Japan, and China has helped make investment in the American economy look particularly attractive. The Dow Jones and S&P 500 continue to flirt with record highs on a daily basis, erasing short-term memories of their steep tumble in October. The dollar has been seeing its highest volatility in 9 months; after whipsawing all week, the DXY dollar spot index jumped above 88.0 on Friday morning. After rising earlier in the week, the yield on 10 year U.S. Treasuries dropped 2 basis points on Friday to 2.32%.
An ambivalent tone permeated the FOMC meeting minutes, confounding traders after its release on Wednesday afternoon. With no clear signal about whether the Fed was leaning in a more hawkish or more dovish direction, many traders simply opted to sell, leaving U.S. stock indices mostly flat for the day. The Nasdaq was dragged into the red nearly 30 points, dropping by 0.57% on weakness in tech stocks. Crude oil prices finally got a reprieve, as both WTI and Brent crude prices recovered about $1 each. Both benchmarks remain mired below the $80, however.
Despite the modest gains in equities, precious metals rebounded this week. Platinum rose further above the $1,200 mark while its cousin palladium again approached $800 for only the third time since its September slide. After halting below $15.90, silver bounced back in earnest, trading above $16.60 by Friday morning. Gold advanced above $1,200 on Friday, the third consecutive Friday during which the yellow metal made significant gains. From a technical perspective, the move upward has transformed gold’s 50% Fibonacci retracement line at $1,186.70 from a resistance level to its new support. If this reversal continues, gold may avoid its second consecutive year of losses; another year in the red would extend gold’s worst losing streak since 1998.
Moreover, murmurs in the gold market about negative gold forward (GOFO) rates are beginning to get louder. Essentially, the gold forward rate represents the interest one can expect to pay to borrow dollars with gold as collateral. A negative rate indicates a shortage of physical gold; rather than being charged interest to borrow dollars, investors are now paying interest to borrow gold. The gold lease rate even rose from 8 basis points to 34 basis points (0.34%) in a span of just two weeks, and ETF gold holdings (almost entirely a Western phenomenon) are at their lowest levels in five years.
The GOFO rate is negative out to six months, and hasn’t been this far in negative territory in 14 years. The shortage of physical gold in the near-term is a direct result of the past two year’s massive flow of gold bullion from West to East. Gold leaving Western vaults for Asia will likely not end up back on the market, as China and India have not only been buying up gold at historically high rates, but are also content to hold it. Gold refineries in Switzerland are seeing a delay of several weeks in filling orders for 1 kilogram gold bars, as 400 oz London Good Delivery bars leaving the COMEX are being recast into kilo-bars for the Asian market. If the GOFO rate is any indication, physical gold may be hard to come by three months from now.
A LOOK AHEAD:
The options expiry falls on Monday, as traders must either close out contracts or roll them over into futures contracts. This is often a flashpoint for activity in the paper gold markets. OPEC members will be meeting on Thanksgiving while markets are closed in U.S. Most expectations are that the oil cartel will cut production in order to combat fledgling crude oil prices. Next week will see plenty of economic data coming down the pipe in the States, with GDP numbers announced on Tuesday, and first-time jobless claims, durable goods orders, and new home sales set to be released Wednesday. The markets will watch closely when the Swiss gold referendum takes place Nov. 30, a week from Sunday.
By Everett Millman, head content writer at Gainesville Coins, a leading gold and silver distributor.