Risk Aversion Continues – Weaker Dollar Supports Silver

Peripheral eurozone debt yields surge higher on fears of a Greek exit.

Bullion.Directory precious metals analysis 9 December, 2014
By Christopher Lemieux
Senior FX and Commodities Analyst at FX Analytics

Risk aversion continues as global markets continue their slide. The Nikkei falls over 400 points as the yen further strengthens against the dollar, while the Athens stock exchange free falls another  18 percent. The fear of a “Grexit” is causing peripherial debt yields to rise, and the Greek yield curve is now inverted. The three-year debt now yields over nine percent, 75 bps higher than the 10-year.

As expected, precious metals continue to be supported via risk aversion on various geopolitical concerns. Silver has seen a lot of action, rising roughly $3 per toz. since briefly carving out a 14-handle following the Swiss gold referendum. (I mentioned the potential for a 14-handle of silver here).

A inverted, or negative, yield curve is when longer-date debt has a lower yield than near-term debt. This is an indication that serious risk to the economy is looming, as traders and investors demand higher yields to take on more risk. The three-year yield has surged to pre-bailout levels. The problem is that even with bailouts of billions and billions of euros, Greece has yet to get their fiscal train on the tracks.

The fall of the dollar has supported the move in silver, as it is largely a linked pair trade (buy dollar/sell silver). The US dollar fell after loosing momentum underneath 90. In “Gold Finding Comfort Above $1,200,” I said:

The US dollar index is higher on the day, just a tad below 89. The move in the dollar is capping the gains in gold. However, if history repeats itself, the roles of gold and the dollar will reverse drastically. The Federal Reserve has been tight lipped recently, but a stronger dollar will continue to pressure inflation expectations. In reaction, the Federal Reserve will intervene to some degree. In recent years, the dollar has reached 90 three other times since 2009. Shortly thereafter, the dollar sank below 76 each time.

It is too early to determine whether or not there will be an immediate drop to 76, but history repeats itself. There will likely be a decline in the dollar that looks like a staircase as traders lose faith in central banking. In my interview with Dukascopy TV’s Sinead MacLaughlin, I mentioned that when it gets time to act, the Federal Reserve will act more like ECB’s Mario Draghi and do nothing.

In “Angry Eurodollar Traders Have Had Enough,” my thought of Fed credibility is shared. Todd Colvin, senior VP at Ambrosino Brothers, said:

Fed talk is losing its luster. Data is irrelevant unless it’s extremely weak or extremely strong… This is the year the Fed is going to lose credibility when it gets to March or June and they announce why they’re not moving.

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