Precious Metals Part Of Tuesday Selloff On Global Supply Chain Fears

The disaster in Japan has caused fear selling in the equities markets though some analysts were surprised to see the massive selloff in precious metals as gold and silver have been known to perform well when other asset classes are in danger. This trend has been especially true over the last two years as the global markets have been unstable for some time which has added to the attractiveness of gold and silver denominated assets. Gold was down over 2% while silver was down well over 4%, I am certain that despite short term overbought conditions, based on the situation in Japan, the market is wrong to be bearish on metals and I expect a the rebound to be swift.

The damages in Japan as of today are above $108 billion US and rising quickly. The Japanese have the second largest debt to GDP ratio in the world and can not cover the damages by printing money without devastating inflationary consequences. Their attempt at a $7 billion Yen relief stimulus on Monday did almost nothing to stop the Nikkei 225 from losing over 1000 points Tuesday morning so ramping up the printing press doesn’t appear to be a viable option. Their only option may be to sell assets. As we know, Japan is the third largest holder of US debt, behind China and the Fed. If the Japanese are forced to sell US bonds on the open market, we might as well call it game over. Such action would force the Fed to further expand their balance sheet which of course would mean an increase in inflation (to say the least) on top of the QE and ZIRP program. So the Japanese can pick their poison… attempt to somehow print their way out of trouble, or liquidate US debt holdings as yields rise on fear of inflation. UPDATE: The Japanese added another fiscal stimulus and they are reports that The BOJ may hold emergency meetings regarding fiscal policy within the next few days.

Another reason to be bullish on precious metals is that according to reports from Zero Hedge, the treasury as of this weekend will run out of cash as there is no treasury auction and our current economy is 100% dependant on federal spending. In other words, if action is not taken, the government will literally cease to operate starting this weekend. If I wake up tomorrow and Ben Bernanke is still bald, the US will come up with a way to use inflationary policy to avoid a government default.

Moving on, let’s get to the markets.

Spot Silver 3/15/2011

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iShares Silver Trust 3/15/2011

Based on the noise I heard today, one might think that silver futures were going for $15 on the market. The reality is that SLV opened below the 20 Day MA during the US session and rallied nearly $2 before closing down $1.40. Meanwhile spot silver broke the trendline we’ve been covering but it too found support at the 20 Day MA which means that in technical terms, we haven’t confirmed any type of correction. I have been saying for some time that silver was overdue for a pullback to the 20 Day MA, and that pullback happened today, though it was largely driven by fears of supply chains breaking down thanks to the destruction caused by the Tsunami in Japan and not nearly as driven by technical indicators as some analysts have now lept forward claiming credit for labeling it as overbought. Again, I have recently stated that silver was overbought and that it would find support at the 20 Day Ma, however, while I was correct to call support at that MA, I won’t take credit for this pullback as it would be preposterous to do so when it’s clear that no one could have predicted the explosion of a nuclear reactor last week. That said, it’s not at all irrational to think that silver can go lower here and test previous highs as support before the market becomes bullish again. Producers are still lagging immensly which is a sign that we are not in a crowded trade in the long run.

As for gold, it has been much weaker than silver and will likely continue to lag the commodities sector. However as our 3 year weekly chart shows us, there are multiple instances since the financial crisis where gold has tested the 20 Day MA a second time within weeks of initially finding support during a correction. Judging by price activity over the last few months, it appears that it will test that moving average once again before any attempt at $1500 or more is made.

I showed the progress of the S&P 500 last week, noting the bearish divergences on the MACD and the RSI and the topping wedge pattern that formed after the $1344 high. I certainly see this as a confirmation of a top in equities and the bulls are not yet ready to make attempts to push the market higher. There appears to be strong resistance at $1300 and I don’t expect that to break anytime soon barring a drastic change in macroeconomics or monetary policy.

Money from Tuesday’s trading went into the dollar, bonds, and the yen. It appears that the dollar is still considered a safe haven at least in extreme economic conditions. To reiterate my opinion of the euro, I’m certain that it’s only a matter of time before the exchange rate falls dramatically and since the earthquake is going to have lasting effects on the global economy, it may be safe to say that it is also a catalyst for a less attractive euro as the fear of deflation in Japan is higher than ever despite repeated attempts at fiscal stimulus.

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About Aaron Basile
Market Technician, Equity/Commodity Trader, Austrian Economist, Contrarian Investor

One Response to Precious Metals Part Of Tuesday Selloff On Global Supply Chain Fears

  1. Rene says:

    I like the change in your photograph…..very professional

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