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Precious Metals Fall with Traders Upbeat on Economy


Silver falls through support, reaching the lowest price point in four years, while gold reaches an eight-month low on optimism.

Christopher-LemieuxSMBullion.Directory precious metals analysis 19 September, 2014
By Christopher Lemieux

Senior FX and Commodities Analyst at FX Analytics

Precious metals are down, as silver is punished to the lowest price per ounce in over four years. Gold futures declined to an eight-month low, hovering above $1,215 per toz. The fall in gold and silver was accelerated after the Federal Open Market Committee (FOMC) were quite dovish on leaving lax monetary policy for a “considerable time” after asset purchases end, which is suspected to end next month.

Market participants are quite optimistic that the Fed will raise its key Fed funds rate earlier than expected, which pushed the dollar’s win streak to 10-straight weeks. The US dollar index (DXY) is challenging 85. David Meger, the director of metal trading at Vision Financial Markets, said “money continues to move into equities and there is more optimism about the US economy.

Conflicting messages

In the eyes of those leveraging on risk during this easy money policy, the economy is “gaining traction.” However, growth forecasts for the United States continue to decline.

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The FOMC long run growth rate for real GDP (midpoint) has slide to a meager 2.2 percent. The International Monetary Fund (IMF) has slashed it’s US growth forecasts twice this year.

Originally, the IMF cut forecasts from 2.8 percent to two percent GDP growth in 2014. Most recently, the IMF forecasts a paltry growth expansion of 1.7 percent this year. The Organization for Economic Cooperation and Development (OECD) just cut its growth forecast for the US Monday, expanding only 2.1 percent. US business economists have, too, lowered growth forecasts.

In the IMF’s recent growth cut, “risk around this outlook include slowing growth in emerging markets [a key reason why the Fed will relent higher rates], oil price spikes related to events in Ukraine and Iraq, and earlier-than-expected interest rate rises.” 

Wait, the markets are suggesting that an increase in rates will be due to a strengthening economy. Unfortunately, it will not be because the US economy is fueled 70 percent by consumption which is highly dependent on taking on debt. The higher the rates, the more costly debt will become.

The US economy expanded only 1.9 percent in 2013.

Recent data causing markets to be… optimistic

Data has fallen off a cliff. The August non-farms payroll data was more than just disappointing. It snapped the upward trend in jobs added since January’s infamous “bad weather” related non-farms report.

But, it looks as if non-farm payrolls could have created an inflection point. In August, only 142,000 jobs were created. This was 40 percent lower than the general consensus, as well as below the most bearish of forecasts that were in the upper-190s.

One month is not enough to go on, but non-farm payrolls have deteriorated quickly from the 298,000 high, which was comprised of over 800,000 part-time jobs added and 500,000 full-time jobs slashed.

Industrial production fell.1 percent, as economists were expecting an increase of .4 percent following a .2 percent increase in July. And housing is continuing its decent with building permits and housing starts falling below expectations.

The Divide

As traders and the wealthy usher in daily new highs in equities, there is a divide that continues to grow.

Those “optimistic” on the economy were well-off to start with the most optimistic grouped in the higher income brackets. Nevertheless, the S&P 500 hit another “all-time” high today, as the dollar remains highly overbought and precious metals tank.

Amid all-time high equities, data from Bloomberg show that a measure of economic outlook (as viewed by the American populous) fell to the lowest level since October 2013.

The Bloomberg Consumer Comfort Index fell to 41.5, the second lowest reading since January 2012. “Stagnant incomes and lingering weakness in the job market are real challenges,” said Gary Langer, president of Langer Research Associates.

But, do not worry! The S&P 500 hit 2,017 earlier today.

The index showed that those earning $50,000 or more had a pickup in confidence, while those below $50,000 saw a decline in overall economic outlook.

The rise in risk assets and the decline in metals is simple trend investing. One goes long on assets increasing, and short those that are not. However, that does not mean it is the most suitable thing to do over the long run, and the mean reversion will be tremendous.

The US economy has to pick up big and soon, or there will be a lot of hurt. If the Fed backs out in October merely due to necessity, traders will have to get a grip on reality and lackluster economy.

Since 2000 (only 14 short years), the US equity markets have been halved twice, destroying the wealth of millions of Americans.

We are likely to witness a third time in less than 20 years.


Feature image by Mark Herpel

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