Precious Metals Outlook: Long-Term vs Short-Term

The past week was quite “boring” in the precious metals complex. Gold and silver traded lower during the week before recovering on Friday. The miners, obviously, followed a similar path.

On Thursday, we received a publication from Thomson Reuters about the gold market. Although most information in that report is well known, we picked out one interesting table which represents a breakdown of the physical gold and supply demand since 2005. The key figures are in the summary (blue box) which also contains wholesale investment demand (gold holdings in the gold ETF's). 

We would like to challenge you, dear reader, with the following question: to which extent is supply and demand in the physical market driving the price of gold? We would like to wish you good luck answering that question.

The physical gold market is not driving the gold price. Most of us did figure that out long time ago. It is essentially what we have been writing about since many years on our website and in the Thursday edition of our newsletter, the one focused on monetary protection and physical gold/silver. The gold price is driven in the paper market, mainly the COMEX futures market.

This edition of our newsletter is focused on investing, so we try to understand the outlook of precious metals and miners based on market data. What we see developing, in the short term, is not very constructive. Last month, we explained that the COMEX futures market showed a bullish setup. We also explained how the “rate of change” of short positions of commercial traders are the key indicator to watch. Our view is explained here: How Strong Will The Next Precious Metals Rally Be?

Today, some three weeks later, we see a deterioriation developing as commercial traders are relatively fast accumulating short positions, as evidenced by the red circles in the folllowing chart. That provides stopping power to the latest gold price rally. This development will likely produce some weakness in the precious metals complex between now and (at least) the summer which is traditionally the strongest period for metals and the miners. Things could turn out different in case something “unexpected” would occur, e.g. an escalation of one of the geopolitical tensions.

So far the short term picture. Let's look at the market in the long run which is probably much more interesting for our readers. We witnessed a very important development in the stock market which seems to indicate that relentless surge of stocks will continue. That sounds very counterintuitive, given high prices in several markets, fear for interest rate hikes in the US, geopolitical unrest across the world, and the likes. But the charts are signaling another message. It is what it is.

The world stock market successfully tested its 2000 peak (red circle on the next chart). At the same time, it successfully tested its 34 month moving average (red line) which is an important trend line for long term investors and which happened to coincide with the 2000 peak.

In simple terms the above means that the bull market in stocks is not over, as there is upside potential to at least the 2007/8 peak. Central banks all over the world are embarking on exceptional monetary policies, desperately trying to create inflation, even if it is artificial or if it comes with the impoverishment of the low and middle classes of society. One thing seems to be a fact: their policies keep on driving the stock market.

But here is the key question for our subscribers: what does all this mean for the precious metals complex going forward? We would say that there is a potentially very interesting development underway in the big picture, one that is more constructive than the one in the short term (which we explained above). An important long term intermarket chart we are following is the one below. It shows the world stock market in blue (same as the previous chart) and how it correlates to both the price of gold (in USD, golden line) and inflation expectations (brown line, expressed by TIPS which are inflation-protected U.S. Treasury bonds).

What stands out on this chart? First, inflation expectations and gold are strongly correlated. Second, in the 2004-2008 period, stocks surged along with inflation expectations and gold (see green box). Third, since mid-2012 stocks have been climbing higher at a time when inflation expectations and gold dropped significantly. Fourth, and here it becomes interesting, inflation expectations are on the rise again, see the blue trendline since 2014.

Mind that it takes time before long term trends turn. Although inflation expectations could be rising, it could take some time until that trend is reflected in the precious metals complex. Also, it could well be that this is a temporary phenomenon. But it surely is a trend to keep a close eye on. If this trend continues, we would not be surprised to see a sharp rally in precious metals, even with the potential to reverse the ongoing downtrend. 

Combine this big picture and short term view which we both explained in this newsletter, and we could make that case that this summer could become very hot for precious metals. Obviously, we will be following these trends closely, and will update our subscribers “as required.”

In closing, we would like to add that we are preparing a very insightful article about what is driving the gold price. That will be distributed shortly, along with the announcement of the exciting news we mentioned in our introduction.

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Chart courtesy: Sharelynx, the place to be for gold/silver charts, and StockCharts

Courtesy of http://goldsilverworlds.com/