Gold was in another correction mode on Friday -- the fifth in less than a month -- dipping briefly below $1600; a big disappointment to the bullish crowed betting that the yellow metal will hit $3000 early this year. Silver dipped below $30.
(Click to enlarge)
(Click to enlarge)
Gold ETFs like SPDR Gold Shares (GLD) were also sharply lower (down 1.83 percent); silver ETFs like iShares Silver Trust (SLV) followed through in sympathy (down 2.42 percent).
Strong U.S. consumer data; a stronger dollar; and technical factors were all cited as the factors behind the sell-off in precious metals. Are these corrections the signal of an even bigger correction?
As I wrote in a previous piece, it all depends on the time frame of this question -- as well as assumptions made about the future state of the world economy. In the short-term, gold and silver are expected to continue their correction for three reasons:
- First, European sovereign debt risks seem to be evaporating for the time being, as the EU and the ECB seem to have things under control.
- Second, an improving U.S. economy will make it less likely that the FED will launch another round of Quantitative Easing (QE)-the primary fuel of the recent gold rallies. Besides, Fed's QE impact on the dollar and the metals has been increasingly neutralized by ECB's and Japan's QE.
- Third, anxiety over Abe's promise to print yen until it creates 2 percent inflation in the land of the rising sun.
In the long-term, things are unclear. The direction of metal prices will be be determined by the direction of the world economy. A strong rebound in the world economy would be bullish for the metals, especially if it is accompanied by inflation- though such a scenario is very unlikely.
A weak rebound, or even a prolonged stagnation-a very likely scenario after the data that came out from Europe and Japan on Thursday -- would be bearish for the metals.
Bottom line: The best days may be behind for the precious metals, at least until the next crisis, provided that central bankers still have enough ammunition to fuel another rally.
