GOLD PRICES ARE IN THE FED’S HANDS

 
David Morris
ODD things can happen to financial markets in shortened holiday weeks – and I’m not only referring to the death of Osama bin Laden. Typically, volumes are light as there are fewer market participants. Often, these quieter periods are used as a cover to push out unpalatable news items. China has often used an extended trading break to announce tightening measures. Last week’s Easter holiday brought some extraordinary movements in silver, despite the absence of any relevant announcements. Prices shot up 7 per cent last Monday before falling 10 per cent over the next two days. Many analysts were quick to brand this move as the “bursting of the silver bubble”, and a clear signal that the metal had rallied too far, too fast since the beginning of the year. There were intense gyrations again yesterday after the news of bin Laden’s demise.

Silver has risen 85 per cent since the end of January to hit its all-time nominal high in dollar terms. Last week it rose to $49.79 on an intra-day basis, breaking above its previous record of $49.50, established in early 1980 when the Hunt brothers attempted to corner the market. But after making this fresh record, silver fell back rapidly to finish the day below $46.50. I’m not so sure that this proves anything, either from a bearish or bullish perspective. Silver is a notoriously volatile contract with relatively light volumes even in normal conditions.

In fundamental terms, nothing has changed. Despite sharp price rises, silver remains in demand for both industrial and investment purposes. In addition, the possibility of a physical supply shortage and a short-squeeze continues to grow. Gold’s progress has been rather sedate in comparison. Yet it is also a strong performer, and made a fresh nominal all-time dollar high last week. But it is easy to see how silver has outperformed gold by looking at the gold:silver ratio. This stood at 1:66 this time last year meaning that one ounce of gold would buy 66 ounces of silver. It now stands at 1:33. Both precious metals soared again following last week’s Federal Open Market Committee statement and press conference. The US Federal Reserve was much less hawkish than expected and this drove the dollar lower. The Dollar Index has broken multi-year support levels and looks set to fall further. If it does, then we can expect both gold and silver to continue to attract buyers. And this situation won’t change until we see a turnaround in Fed policy.