Gold and silver are feeling the pressure of the combined drag of deflationary fears in the Eurozone, a slowing Asia and a stronger U.S. dollar. Gold finished the month of October down 3.3% and Silver down 5.6%. On Thursday evening (10/30) the Bank of Japan (BoJ) surprised markets by announcing increased buying of government and other assets, scaled up from some 10 to 20 trillion Yen ($91 to $181 Billion) in an effort to stimulate the domestic economy and fight excessively low inflation. In an initial reaction, equities around the world surged higher but the real movement arguably took place in the currency markets, with the yen falling some 2.5% vs. the U.S. dollar and pushing the euro lower along the way. The BoJ’s move may have put further pressure on the European Central Bank (ECB) also to step up to the plate as well. While the BoJ certainly has been fighting for years to revive Japan’s economy with little success, with Thursday’s announcement the central bank appears to be borrowing a page from the U.S. Federal Reserve’s book: if you want markets to react come at it with a big stick!
Since April of this year, the U.S. dollar has been firming vs. the yen and euro, being driven higher by notions of a U.S. economy on firmer footing, the Fed hinting at implementing exit strategies and verbiage from the ECB suggesting that it was prepared to act if need be. So perhaps now the race is officially on between the BoJ and the ECB, with the BoJ taking the lead for now. Looking forward to the Nov. 6 meeting, let’s see if the ECB will follow suit.
But what effects might this monetary policy have on the United States? By taking steps to devalue their respective currencies, Japan and, if implemented, the Eurozone would indirectly be exporting deflation to the nation of current currency strength. With the value of the U.S. dollar increasing, it will take fewer U.S. dollars to purchase commodities. Since many commodities around the world are priced in U.S. dollars, their prices would be pushed lower also. In contrast, consider a price chart of gold priced in euros, showing a largely sideways trading range since January of this year. Priced in U.S. dollars, both gold and silver consolidated in a sideways range between March and late September, waiting for a reason to break out. Silver was the first to react to a slowing China and Eurozone with a breakout to the downside. Nudged on by the BoJ announcement, gold finally followed along.
A closer look at a December 2014 weekly gold chart shows that gold has broken through the triple bottom low at $1,179.40 per oz., approaching the 61.8% Fibonacci retracement level at $1,154.60 from the move from the 2009 low to the 2011 high. I am a believer in the theory that the longer a contract spends consolidating sideways in a range the more momentum it will carry into a breakout. While nothing is certain, a test of $1,000.00 is not out of the question.
Keeping these themes in mind, keep watching the currencies when analyzing the precious metals. Silver has the potential to hint at strength in the industrial sector, and strength or weakness in the yen and euro should not be ignored.