With the Federal Reserve saying as little as possible last week about how they see the U.S. economy and what that assessment portends for the future course of monetary policy, the precious metals markets began taking their cues from the economic data itself as detailed here on Friday, rising sharply late in the week after remaining flat before, during, and immediately after the Fed policy meeting on Wednesday.
Two factors - the prospect that a disappointing labor report this Friday could lead to more central bank money printing in the U.S. and hefty gold purchases by central banks elsewhere in the world last month - have combined to create the most bullish outlook for gold and silver in many weeks. Meanwhile, technical factors point to metal prices exiting their recent trading range sooner rather than later and my guess is that they'll move up, not down.
For the week, the gold price rose 1.2 percent, from $1,642.40 an ounce to $1,662.80, as the silver price declined 1.4 percent, from $31.70 an ounce to $31.27. Gold is now 6.2 percent higher on the year, down 13.6 percent from its 2011 peak, and silver has pared its 2012 gain to 12.2 percent, now down 36.8 percent from its high near $50 an ounce last spring.
While following the Fed meeting and watching markets on Wednesday, I initially feared the worst when the committee's policy statement was released and was found to contain no new hints at another round of Fed money printing. Metal prices initially fell sharply, but quickly recovered, ending up little changed for the day.
It wasn't until futures traders digested the surprisingly weak report on durable goods orders earlier in the day and then saw Thursday's disappointing jobless claims data that prices began to move sharply higher, a trend that continued on Friday when first quarter GDP came in weaker than expected.
With two major economic reports on tap for this week - ISM manufacturing on Tuesday and the monthly labor report on Friday - that are likely to be consistent with the developing theme of slowing growth for the U.S. economy, look for gold and silver prices to move steadily higher, anticipating more talk and then action from the Federal Reserve. Of course, in the unlikely event that the recent series of disappointing reports is followed by a series of upside surprises, then precious metals prices could fall sharply.
Whichever way gold and silver prices move over the near-term, it now seems likely that they will indeed move after a period of consolidation that has persisted for many months now following last year's highs and this story by trader/technical analyst Peter Brandt last week laid out the case for the gold price breaking out of its recent trading range sometime in the weeks ahead.
Arguments can be made for moves in either direction - the one that gold bulls fear being depicted in the graphic below in response to the descending triangle since last fall.
This sequence of lower highs and lower lows is what has prompted some analysts to proclaim that the long-term gold bull market is now over. However, that call has been heard many times before since the gold price began rising a dozen years ago and, in my view, this time will be no different than any of the others.
The bullish case for gold over the near-term rests on the symmetrical, inverse head-and-shoulders pattern shown in the chart below, one that suggests the late-December low for metal prices marked the bottom for this correction.
That consolidation periods such as this are normally resolved by continuing the prior trend (upwards, in this case) favors higher prices ahead, but, this is certainly not a guarantee. As Peter noted, "The fireworks will soon be lit. The only unknown now is the direction".
Despite the uncertainty over the short-term direction, the long-term outlook for precious metals prices remains favorable, if for no other reason than that central banks around the world continue to trade in their paper money to buy gold.
The IMF reported last week that during the month of March, emerging market central banks purchased a whopping 58 tonnes of gold bullion and this doesn't include what is widely believed to be large-scale buying by the Chinese that the world will probably not learn of until years after the fact.
Mexico, Russia, and Turkey were the three largest buyers last month with additions of 16.8 tonnes, 16.6 tonnes, and 11.5 tonnes, respectively, and gold purchases are expected to continue throughout the year as Western central banks continue their easy money policies. After being net sellers of gold to the tune of 400-500 tonnes per year in the years leading up to the financial crisis in 2008, central banks became net buyers in 2009 and purchased 440 tonnes of gold last year - the biggest increase since the 1960s - and this has been a major reason why the gold price has been rising in recent years.
That China - the world's leading producer and consumer of gold - is believed to be quietly accumulating large quantities of gold as part of an effort to increase their reserves from the current official holdings of 1,046 tonnes to some multiple of that amount - makes the long-term prospects for gold even more favorable.
Any investor thinking that gold is overvalued at $1,600, $1,700 an ounce or more should consider that central banks around the world are indeed paying these sort of prices to buy the metal, the world's experts on "money" increasingly favoring what has served as money for thousands of years rather than the still relatively untested paper variety with a very poor track record throughout history.
As for retail investment demand for gold and silver, it's worth noting that although silver ETF holdings have declined in recent weeks, metal held at gold ETFs continues to be remarkably stable, reflecting only a tiny fraction of the nearly 7 percent gold price decline seen since late-February. Investment banks remain bullish on precious metals, Goldman Sachs saying last week that they expect more Fed money printing to drive the gold price to $1,840 an ounce while Citibank analysts remain convinced that the current consolidation will lead to their target price of $2,400 an ounce.
Lastly, in one of the most bullish price forecasts that I can recall seeing from a major bank, Bank of America analyst MacNeil Curry said he sees the gold price reaching $3,000 to $5,000 an ounce - possibly as high as $7,000 - before the secular bull market is over. He cited the same reasoning for a continuation of the gold bull market as noted here last week in that long-term bull markets such as this end with a bang, not a whimper, and last fall's $1,920+ price peak was the latter, at least when compared to the 1980 peak.
Additional disclosure: I also own gold and silver coins and bars.