Precious metals traders have tipped their hand

Six ways from Sunday

Image by YeeLey from Pixabay.

Last week saw the exposure of what now appears to be the dominant rationale behind gold and silver investing driving prices of the precious metals ever higher, especially that of silver. Hot tip: It ain’t Hong Kong’s woes, nor is it further central bank stimulus worldwide.

Following Hong Kong Chief Executive Carrie Lam’s conciliatory withdrawal of the despised extradition measure, the original introduction of which has been blamed with igniting this latest protest powder keg in the world’s third most significant financial center back in June, valuations in the precious metals complex continued to climb in the immediate aftermath. For a very brief moment, some were hopeful that such concessions would lead to peaceful dialog and resolution, of sorts. With that in mind, certain investors predicted that stocks in the US would rally on what could only be seen as a positive development. Conversely, they argued metals prices would fall since there was clearly one less reason to be in so-called safe haven assets. It was risk on, again.

However, gold and silver prices rose with US equities on Wednesday, and then failed to continue their upward trajectory the next two days, despite an eventual resumption of riots and issuances of warnings from Beijing. As we speak, futures in gold are slightly up, and in silver are slightly down. It would seem we can take that one off the list as the main explanatory variable for the steep surge in value of both gold and silver since the end of May, although the timing lines up nicely.

Until the end of last week, it wasn’t clear if precious metals traders were playing the “fiat currencies will be devaluated into worthlessness” card or not, given our understanding that stimulus packages are on the way in Europe and China, and fingers are crossed for further Federal Reserve interest rate cuts in the US. Well, it looks like all that stimulus has not really been the main driving force, either.

The stimulus is close at hand. On September 16th, China is set to begin cutting the reserve requirement ratio it holds its banks to in order to free up some ¥900 billion CNY for additional business loans. Meanwhile, the ECB is supposed to disclose a stimulus package this coming week, and many expect, nigh are even counting on, a Fed rate cut this month. Yet, gold and the more volatile-of-late silver gave up considerable ground on Thursday and Friday. If stimulus were the high-speed train they had booked tickets on, I’d think they’d still be riding it.

Which brings us to the most causal explanation, which others have already reported on: the US-China trade war. Except, let’s face it, it’s not just some trade war. It’s about the decoupling of these behemoth economies, it’s about the state of their diplomatic relations, it’s about whether they will engage in mutual destruction or not, it’s about preeminence.

China wants the Yuan to be a reserve currency, it wants its sovereign bonds in all the debt indices, it wants its culture to be recognized and appreciated, it wants to hold political sway over other nations (and it wants things we probably can’t hardly grasp yet). The former are all things the US has had for some time.

That being said, all that had to happen thus far to send gold and silver tumbling (and stocks mooning) on Thursday and spilling into Friday was news out of China’s Commerce Ministry this time that Vice Premier Liu He had spoken with US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin over the phone and they had agreed to in-person trade talks in October, no date specified. Yep, that’s it.

Mind you, both sides have now enacted tariffs and more are on the way, in addition to all the heated back and forth, the Huawei drama, and suggestions or even orders from both sides to their respective business communities to find ways to do business elsewhere and without the other. The world’s largest consumer and the world’s leading producer of goods are still going at it, but Chinese officials mention one phone call leading to an agreement to resume in-person talks and you have a literal and heavy reversal of fortunes over two days in gold and, especially, silver, as soon as the headlines trickled down to traders.

Gold and silver futures have already begun trading again on the global markets, even though it’s still only Sunday here in the US. The driving factor in their valuations is much more clearly in focus, now, and some of the noise has been removed, as well.

What will happen next? We’re all eyes and ears. Pay extra careful attention to any discussion of trade talks and other financial dealings between the two nations, and expect dramatic price swings. Consider strategies that employ hedging and/or take advantage of both long and short sides, such as options strangles. Or, engage in an honest self-examination of how last week felt. There’s still time to buy, but there’s also still time to bail.



Philip Valenta, MSF :: [mezcalindo]

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