- Gold and silver saw their worst selling in four months.
- Easing tensions in Ukraine and a more hawkish Fed were largely responsible.
- Gold ETF flows remain a positive sign for the 2014 rally to continue.
Gold and silver prices gave back a good portion of their year-to-date gains after Crimea's secession vote came and went without any further geopolitical turmoil, and then the Federal Reserve surprised investors by indicating interest rate hikes could come sooner than expected. Both of these developments were decidedly negative for precious metals and cut short their recent rallies as the metals saw their heaviest selling since November.
Last week's sell-off clearly changed what was a very positive technical picture into something much less so, and now, rather than watching resistance levels above, traders are eyeing support levels below. A surging U.S. dollar has added new headwinds for the metals, however, much of last week's dollar strength was due to comments about interest rate hikes by new Fed Chief Janet Yellen that many think were simply in error. U.S. ETF flows continue to be an encouraging sign for gold market bulls as investors actually added to their holdings after a series of losing sessions.
For the week, the gold price fell 3.4 percent, from $1,382.00 an ounce to $1,334.70, and silver dropped 5.5 percent, from $21.46 an ounce to $20.27. The gold price is now up 10.7 percent for the year, still 31 percent below its record high of over $1,920 an ounce in late 2011, and silver is up 4.3 percent so far in 2014, now 59 percent below its all-time high near $50 an ounce three years ago.
After the gold price briefly reached a six-month high over $1,390 an ounce on Monday, precious metals tumbled to three-week lows in trading on Thursday in the aftermath of Janet Yellen's first policy meeting and press conference as Federal Reserve Chairman. Fading safe haven demand as a result of easing tensions in Ukraine had already sent metal prices lower earlier in the week, but the surprisingly hawkish outlook on interest rates surprised markets and exacerbated the declines for gold and silver, changing the technical picture for the metals in the process.
As shown below via Stockcharts, what was once a narrowing of the 50-day and 200-day EMAs (exponential moving averages) toward the very bullish formation of a "golden cross" as detailed here last week now has the two curves set to diverge again.
Importantly, the gold price bounced off of its 200-day moving average on Friday after falling for four straight days and, when considering bullish ETF flows (as detailed below), this could prove to be a short-lived sell-off.
To be sure, political upheaval in the Ukraine that led to Crimea's secession vote and the threat of Russian military action had, collectively, been responsible for much of the rise in metal prices during the first half of March.
When Russian President Vladimir Putin indicated last Tuesday that he had no plans to seize any other parts of Ukraine, this quickly changed from a potential international crisis to a regional dispute and one less reason for traders to bid gold prices higher.
That's not to say that this will remain a regional dispute, but for now, it's a non-factor for precious metals markets.
(As an aside, if I were Vladimir Putin and I intended to annex all of Eastern Ukraine or parts of it, I too would have said last week that I had no plans to do so.)
As for the Fed, it remains to be seen what the fall-out will be from Janet Yellen's new timetable for the start of interest rate hikes. Previously, markets believed the soonest rate hikes would start would be mid to late-2015, but Ms. Yellen's definition of "a considerable time" being "around six months" (i.e., for the time between the Fed winding down its bond buying program until it begins normalizing interest rates) brought the first interest rate hike forward to as soon as early-2015.
For reasons that are not difficult to understand, this caused traders to rethink what the gold price should be here in 2014.
Of course, these hawkish comments (from an avowed dove) also prompted a surge in the U.S. dollar and, since there is a strong inverse correlation between precious metals and the trade-weighted dollar, this added to last week's troubles for gold and silver.
But, there is already a strong push-back from some Fed officials and analysts on the early-2015 start of rate hikes. On Friday, Reuters reported that dissenting policy committee voting member Narayana Kocherlakota, President of the Minneapolis Fed, warned against any talk of tighter monetary policy. This Marketwatch story detailed how Goldman Sachs chief economist Jan Hatzius believes Yellen simply made a mistake during the press conference (what others called "a rookie mistake") and, like a number of other analysts, Hatzius thinks the Fed is on hold until early-2016.
Further complicating the picture over the short term is that U.S. economic data is likely to come in better-than-expected in the period ahead simply because the winter was so severe. There is more than the usual amount of "pent-up demand" from the particularly frigid winter that ended last week and, all else being equal, this will make the data look better than it really is. Importantly, this could add more fuel to the "rising interest rate fire" and cause investors and traders to think a lot more about 2015 monetary policy this year.
Should inflation arise from its deep slumber, that will only add to the talk of rising rates.
One can't help but wonder whether inflation was on the minds of those responsible for the addition of over four tonnes of metal to the SPDR Gold Shares ETF (NYSEARCA:GLD) on Friday. That inflow more than reversed an outflow on Monday that, in the end, made it 8 out of 10 weeks of net additions for the ETF as shown below in what has been a dramatic turnaround for this once-again popular fund.
At the risk of reading too much into small changes in the fund's holdings, it's worth pointing out that Monday's outflows were probably just short-term traders taking profits after the gold price had surged the week prior and then tensions in Ukraine eased.
That seems pretty easy to explain.
But Friday's inflows are far more interesting.
The gold price had already plunged almost $70 an ounce, yet investors and traders in the U.S. were buying gold, not selling it?
American owners of GLD are not known to be cost-sensitive gold buyers, that is, unless you mean they buy when the price is going up and sell when the price goes down. Friday's 4.2 tonne addition could be yet another sign of changing attitudes toward gold in the U.S. here in 2014 after many investors lost faith in the metal last year.
As noted here many times before, gold ETF flows are widely considered to be a good indication of sentiment toward the metal in the U.S. and, since prices are set in the West, this will be a key factor in sustaining the current gold market rebound.
Curiously, despite all the big price moves for silver in recent weeks, the holdings for the iShares Silver Trust ETF (NYSEARCA:SLV) seem to be "stuck" at 10,165 tonnes, not having moved from that mark since early in the month. The holdings for SLV are up 200 tonnes so far this year and, after last week's rout, the price of the metal is not far from where it began the year, more evidence that, lately, there is little to be learned from SLV inventory flows.
It should be interesting to see how developments in the Ukraine and at the Federal Reserve play out in the days ahead. Something tells me we didn't really get the definitive answers that many market participants thought they heard last week.
Additional disclosure: I own gold and silver coins and bars along with gold and silver ETFs other than GLD and SLV