Gold And Silver Fly High As Fed Commentaries Sink In

As the recent commentaries that reflect the most current thinking of the Federal Reserve sink in to the brains of analysts and investors, fundamental market conditions have suddenly changed.

Gold is especially reflective of the new conditions. It is up today nearly $21.00 per ounce. About 1/3rd of that total rise is due to dollar weakness but the rest can be attributed to bets being placed because the consensus is that the Fed will not be raising rates anytime soon.

Low interest rates – or more precisely interest rates that are not going as high as some experts thought – mean that the environment for non-interest-bearing assets (like commodities) remains fairly favorable. Gold and silver are obviously in that class of investments.

There has been especially deep and sustained buying of silver in the Shanghai market. Spot silver is up almost 4.5% on today’s session. That has served to pull spot gold along with it as people with deeper pockets seize an opportunity. (Platinum and palladium are also soaring.)

There are a number of reasons lurking behind the silver buying in China. One slice of the answer is that China’s industrial output has supposedly ticked up. But there is something more troubling that we should consider.

One of the mantras repeated in the U.S. is that the world’s largest economy is overburdened by debt. Relative to GDP, China’s total debt is about quadruple that of the United States. Strategists are looking for a way to sidestep the ramifications of such an enormous debt, and silver – being the less expensive sister to gold – is increasingly seen as a good bet within reach of many budgets. It also has room to grow.

But, to reiterate, silver is helping drag gold up.

Odd as it may seem on such a bullish day in precious metals, other haven plays are slightly weaker. The U.S. 10-year bond yield is higher and face price is lower, indicating that haven bettors are not biting on bonds right now.

Additionally, the U.S. dollar is up against the yen, another barometer that tells us that haven plays are off for the day.

Equities are the tricky fundamental read right now.

Working in their favor is the same factor working in gold’s favor. That is to say that the very dovish Fed commentaries should give some buoyancy to stock prices. And that is true to some extent.

However, there are a number of uncertainties holding equities back in the U.S. The earnings season has given us mixed results. The very data that is pushing the Fed deeper into dovish territory is naturally reflective of limp business conditions and slow consumer spending.

There are a number of bright spots in the U.S. and other economies, however.

Energy seems finally to be righting itself, if still a little choppy. Financials, despite some serious underperformers, is a strengthening sector. Medical/pharma is also strong. Johnson & Johnson, UnitedHealth and Goldman Sachs contributed most to the modest gains today, for instance.

Techs were the biggest drag on the three major indexes. IBM was off 6%, a plunge that accounts for about 60% of the loss on the Dow today. The NASDAQ reacted to the softness in tech. (Netflix and Illumina were crushed in trading.)

Once we steer through the quarterly earnings announcements, we’ll see stronger prices.

Wishing you as always, good trading,