Monday, January 23, 2012

Markets Take Pause, But, If Everything Is so Swell, Why are Gold and Silver Soaring?

While it was somewhat expected for stocks to take Monday off after the successful ramp-up of the past four weeks leading directly into options expiry on Friday, what is more befuddling to anyone with at least half a brain (and all of our readers have fully-engaged complete brains, we are quite sure) is the stratospheric rise in the precious metals, gold and silver, since the end of last year.

In the case of gold, which plummeted to its lowest level since July 7, 2011, precisely on the last trading day of the year, December 29, at 1531.00, the close today at 1,678.30 in New York represents a move of 8.8% to the upside in 2012, easily outpacing the much-ballyhooed gains in the stock market over the same span.

Silver's move from 26.16 on December 29 to its close today of 32.27 is an even bigger move of 18.9% if one was able - or willing - to catch the falling knife precisely at its bottom.

Conventional thinking on precious metals and their relationship to stocks and currencies is rather straightforward. If risk assets, such as stocks are rising, gold and silver, the safe havens, should be lower or, at best, flat, and a strengthening currency would also serve to flatten the price of the metals.

However, the dollar was particularly strong over the first part of the new year, rising, according to the Dollar Index (^DXY) from 79.61 to 81.52 on January 13 before taking a dive back to its close today at 79.70, coming up relatively flat itself in the new year.

A theory on the price and manipulation of gold may be useful in understanding why gold has been so strong. First, the price collapse in the latter half of 2011 may have been a coordinated attempt by the fiat-crazed central banks to make gold look more like a risk asset than a safe haven, as it's gain for the year was a paltry 9.35% (from 1400 to 1531). The same scenario could be applied to the less-liquid silver market.

Understandably, not everyone ascribes to the manipulation theories, so the moves lower at the end of 2011 could have just been year-end selling or profit-taking. Whatever the case, the sellers in late December are now kicking themselves in January.

This does not explain why stocks and precious metals are rising at the same time, though it might be a bit of front-running in the metals as opposed to a pure hope and hype new year rally which Wall Street seems to find irresistible (as in, they do it almost every year). With January options expiration behind us, it will be interesting to keep track of these various price levels (dollar index, S&P, Dow, NASDAQ) going forward.

With Wall Street off to a flying start of the new year, even in the face of sub-par GDP growth worldwide in 2012, one may be suspect of this most recent slow-motion rally in stocks, yet hopeful that the precious metals would continue their decade-long bull run. Just today, Christine Lagarde, head of the IMF, politicked for a larger European bailout fund of up to $1 trillion, and mentioned that the IMF would be lowering its global GDP forecast, due out tomorrow, though she would not be specific on the size or scope of the reduction.

In New York, stocks vacillated across the flat line, ending with a split decision and overall flat close. The FOMC of the Fed begins a two-day rate policy meeting tomorrow, with the usually-suspect Wall Street crowd hoping for some signal on a renewal of QE, as a means by which to boost their bottom lines, risk free, though an outright commitment by the Fed at this time is unlikely. There would need to be more signs of sluggishness in the economy, which, after the past four weeks of stocks rallying and fairly benign economic data, have yet to surface.

Dow 12,708.82, -11.66 (0.09%)
NASDAQ 2,784.17, -2.53 (0.09%)
S&P 500 1,316.00, +0.62 (0.05%)
NYSE Composite 7,855.52, +26.19 (0.33%)
NASDAQ Volume 1,689,429,500
NYSE Volume 3,744,960,500
Combined NYSE & NASDAQ Advance - Decline: 2898-2637
Combined NYSE & NASDAQ New highs - New lows: 203-11 (yes, this is extreme)
WTI crude oil: 99.58, +1.25
Gold: 1,678.30, + 14.30
Silver: 32.27, +0.60

No comments: