On Wednesday on Wall Street, as well as on Thursday in Asia, we observed declines in major stock indices, accompanied by an increase in the value of the VIX fear index contract. At the same time, cheaper gold and silver seem to form a mixture showing the return of uncertainty to the markets and a lack of faith in the sustainability of the economic recovery.
Several Fed members (Loretta Mester, Charles Evens, Randal K. Quarles and Chairman Jerome Powell) made their speeches on Wednesday. Their words contained warnings about the economic recovery. Representatives of the Federal Reserve stressed that more fiscal stimulus is crucial to maintain economic recovery. This seems to have disappointed investors, as Congress still cannot deliver the new aid package and the markets are wondering if it will ever be implemented again. The Fed has shifted the burden of caring for the recovery to American politicians, which the markets may not like, but the Federal Reserve seems to have done everything it could.
Also, there have been many new cases of coronavirus in some European countries, which have prompted the authorities to take more far-reaching action again. France has imposed new restrictions on bars and public gatherings in several cities in an attempt to suppress the revival of the epidemic. The mayor of New York City, Bill De Blasio, said that urgent action was needed after the situation had improved in some districts. Meanwhile, UK Prime Minister Boris Johnson set new rules to limit the increase in coronavirus cases, including closing pubs and restaurants at 10 p.m. and recommending office workers to work from home if they can.
Once again, the attention of investors seems to be drawn to the precious metal market, including gold and silver. Silver prices are significantly lower and have reached their lowest level in almost two months. It seems that one of the main reasons for the decline in silver prices, but also gold, could be an appreciation of the U.S. dollar, which may help to put pressure on the precious metal markets. Only this week silver prices fell by more than 4 dollars per ounce. It seems that silver may have the worst week since 2011.
Gold, in turn, exceeding $1900 per ounce, seems to have broken technical support, which, combined with other factors, such as the strength of the dollar, can lead to $1800. As a result, the current downward movement may be part of the correction that has started since the second week of August. However, it seems that in the long run, with the expected larger negative real interest rates in the US, gold may still regain its shine and return to the upward trend.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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