Silver is up three times as much as gold so far this year; +26% YTD, versus +9% for gold. This is starting to look like 2010 when silver rose 80% vs. 28% for gold. The 2011 damage in silver was primarily caused by the near-quadrupling of margin requirements from the CME, causing a 10% decline in silver in contrast to a 10% rally for gold. While both metals are due for one more leg down; silver is expected to maintain its oupterformance relative to gold, bringing the gold/silver ratio down to the high 30s from the current 48.
Gone are the days when metals used to rally on sovereign debt woes alone. Central bank asset purchases have taken over as the more consistent fundamental catalyst to trend shifts in gold and silver. The money/yield substitution notion by gold has been behind the 17% and 43% rally in gold and silver from the week of the LTRO-1 (December 20, 2012). The subsequent week was also accompanied by certainty of at least $50 bln in asset purchases from the BoE and yen 10 trillion from the Bank of Japan.
Fed Chairman Ben Bernanke's Wednesday remarks dampening the possibility of further Fed stimulus emerged via a reference to inflationary pressures rather than an acknowledgement of improved economic performance. Expectations of QE3 by the Fed have become part and parcel with a falling U.S. dollar, rising euro and rallying commodities. Any blow to those expectations hampers the current uptrend in risk assets.
Looking ahead, bond vigilantes will scrutinize the inflation and growth implications of upcoming data, which could provide the next dose of upward momentum for bond yields. The combination of prolonged strength in energy prices and continued improvement on the U.S. labour market front would be sufficient in raising interest rate expectations, causing the rest of FOMC members to potentially reconsider their future speeches regarding the recently extended zero rate policy. This would cast a pall on metals, to the benefit of the USD.
Implications for gold, silver
Gold remains supported by a confluence of two major moving averages (100 and 200 daily moving averages at 1692 and 1675 respectively). These are considered immediate support levels, which could well be tested on the next profit-taking bout in equity indices. Long-term gold investors ought to keep a check on 1620s, which remains the long term trend-line support extending from the lows of September 2008. As long as this level survives prolonged deleveraging, fresh buying will likely lift the metal back toward the 1800s. A resurfacing of sovereign debt woes combined and renewed central bank easing policies stands as the likeliest fundamental catalyst.
Silver investors may have finished licking their wounds from last year's quadruple hike of margin requirements from the CME, which dragged the metal by 10% by the end of 2011. Removing that intervention from the authorities, the situation would not have been as dire for the metal, considering that the fundamentals for commodities have improved due to stabilization in the BRICS. Technically, silver's weekly chart failed to cross its April trendline resistance, which coincided with failing the 55-week MA. As long as it holds above $29, silver is likely to regain the $42 territory. Any decline below $29 risks extending losses toward $26, which denotes the last defending foundation for the 4-year uptrend. Considering silver's exposure to industrial demand relative to gold, the perfect storm would be prolonged LTRO & QE from the ECB/BoE and continued pick-up in EM demand for commodities.