Silver is retreating in the face of rising growth risks and heightened civil unrest in the euro zone, which are prompting safe-haven flows into the perceived safety of the dollar.
Silver is down more than 5% from last Friday’s high at $35.187, having pulled back to retest the 20-day moving-average at $33.396 today. This leaves the high for the year from 29-Feb at $37.501 well protected for the time being.
INDUSTRIAL USES
With nearly half of global demand for silver attributable to industrial applications, waning growth expectations can weigh heavily on the white metals. By comparison, gold is off about half as much as silver from the recent highs on a percentage basis. Of course, silver also led the recent charge higher as central bank actions over the last several weeks stoked inflation expectations; so silver is still more than 20% higher on the year, compared to gold’s 11% YTD gains.
RIOTS SHOW…
This week’s riots in Spain and Greece are testimony to the reality that unprecedented and controversial action by the ECB, in saying they are prepared to buy an unlimited amount of periphery debt, were nothing more than a delaying action. They succeeded in buying about three-weeks of relative market and civil calm, but the underlying issues — debt and austerity — remain and are once again bubbling to the surface.
INFLATION AHEAD
Additionally, I think there is a growing realization that the Fed, ECB and BoJ et al are pushing on a rope in their efforts to generate inflation; or perhaps more accurately, their efforts to fight deflation. In other words, QE3, unlimited ECB periphery bond purchases and expanded BoJ asset purchases may simply not be enough to reinvigorate global growth and create jobs.
THREE RESPONSES
This may prompt one of three responses: They can simply accept moribund growth and high joblessness until markets clear. They can concede that the experiment with zero interest rate policy (ZIRP) and extraordinary monetary and balance sheet expansion has been a failure, forcing politicians to make meaningful fiscal reforms. Or they can push back even harder against deflationary pressures, fully utilizing the open-ended nature of some of their latest promises.
The latter seems the most likely scenario in my opinion, given how far down the path we already are. I therefore believe that the latest retreat in the precious metals is corrective in nature.
GOLD SILVER RATIO
However, rising growth and geopolitical risks, along with political uncertainty in some of the major western countries has me thinking gold may play a little catch-up with silver in the coming weeks. The inability of the gold/silver ratio to sustain recent downticks below 51, and the subsequent rise above the 20-day moving average may be an early indication of this. Near-term potential in the ratio is back to the 54.00 area, where the 38.2% retracement level of the recent decline corresponds closely with the 200-day moving average.
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Read more metals coverage here:
The Gold Standard: A Panacea or More Malaise
Also by Peter Grant:
Could We Have A Currency War On Our Hands? and what does it mean for gold?
[Editor’s note: What do you think? Do you see rising inflation ahead?]
