Gold rose $11.10 to $945.70 per ounce in trading in New York yesterday and silver was up 18 cents to $17.90 per ounce. Gold and silver have traded in a narrow range in Asian and early trading in Europe. Gold reached new record nominal highs at $952.75 and silver has surged over $18 per ounce to new 27 year highs at $18.06.
Gold also surged to new record highs in British pounds and in euro. The London PM Fix at 1500 GMT yesterday afternoon was at $945. Gold fixed at new record highs at £482.76 and €641.20.
Increasing fears of stagflation drove gold to new record highs (non inflation adjusted highs) in major currencies. Both the ECB and the Federal Reserve have lowered their growth estimates and the Fed has also increased its inflation forecast. The Philly Fed Index fell to its lowest level since 2001 and unemployment news was poor with the 4 week moving average of jobless claims rising 10,750 to 360,500. Meanwhile most commodities continued to rise with zinc and copper surging, leading the base metals higher. Equity markets in Asia and Europe are down and fears of a U.S. recession are sure to be to the fore.
Despite the significant and growing inflation, markets have moved to fully price in a 0.50% rate cut at the next FOMC meeting in March. Central bankers are throwing in the towel in the fight against inflation in order to try and prevent a systemic crisis and a subsequent deep recession. The risk is that they let the inflation genie fully out of the bottle. Thereby wreaking havoc in the form of an inflationary spiral as was experienced in the 1970s (or worse in 1920s Germany which led to order-of-magnitude increases in prices and interest rates, redenomination of the currency and a wholesale consumer flight from cash to hard assets).
A Volker style period of tighter money and short term austerity would be more prudent in order to safeguard the health of the increasingly debased U.S. dollar and in order to help put the U.S. economy back on a more sustainable long term economic trajectory involving less consumption and speculation and more saving, production and exports. Savings are necessary in order to fund capital investment, production and long term economic growth. Unfortunately the U.S., unlike China and its other large creditors, has forgotten this in recent years and bought into the new paradigm fantasy that the service economy and profligate levels of debt and consumption could create a healthy sustainable economy.
Support and Resistance
Strong support in gold is now seen at $890 to $900. Short term support is at $940 and $915. After a short healthy consolidation in the $850 to $935 range, gold has broken out on a daily closing basis. A weekly close above $935 today will be very constructive. A close on a weekly or even daily basis above $935 should see us challenge $1,000 per ounce in a very short period of time.
Silver is trading at $17.91/96 at 1200GMT. Silver remains extremely undervalued and $25 looks likely in 2008. Silver’s nominal high of $50 per ounce is likely to be reached in the next 3 to 7 years.
Platinum is trading at $2135/2145 (1200GMT).
Palladium surged to over $497/502 per ounce (1200GMT).
The big ‘M’ or momentum is clearly in favour of precious metals. While these markets may be overbought in the short term, markets can remain overbought for long periods and it would be prudent to make the trend your friend.
Newton’s First Law of Motion is important to consider in this regard. “In the absence of a net force, a body at rest remains at rest, and a body in motion remains in motion indefinitely along the same straight line.” While no asset moves in any direction indefinitely they tend to move in either direction in the medium to long term. This was witnessed in stock and property markets in recent years and will be witnessed in the precious metal markets in the coming years.