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Dallas Fed Fisher’s Prescience And GLD

Recent third quarter GDP growth of 5% at 11 years high brings credibility to Fisher’s bullish dissent which is unforeseen by the FOMC. This brings greater possibility of an earlier rate hike forward to the March or April 2015 meeting especially if it is reflected in the upcoming labor figure. GLD paused its decline in this quiet festive market. This is the time to go short GLD before the market resumes fully in the second week of 2015. Voting against the action were Richard W. Fisher, who believed that, while the Committee should be patient in beginning to normalize monetary policy, improvement in the U.S. economic performance since October has moved forward, further than the majority of the Committee envisions, the date when it will likely be appropriate to increase the federal funds rate.” The quote is extracted from the statement of the Federal Open Market Committee (FOMC) released on 17 December 2014 . Dallas Federal Reserve President Richard Fisher took on a more bullish stance than the rest of the committee. During the meeting, the FOMC took reference from the October 2014 economic data and came to a bullish stance where you can read on my previous article ‘ Dissents At The December 2014 FOMC Meeting Hints At Earlier Rate Hikes ‘. At that point, I was not very convinced about Fisher’s outlook as I believe were the case of the rest of the FOMC. The US were showing some strong number such as the November 2014 non farm payroll of 321,000 which is better than the previous reading of 243,000 and expectations of 231,000 and average hourly earnings increase of 0.4% over 0.1% in October and 0.2% of market expectations. However there were misses as well such as the 0.3% contraction of the consumer price index in November after no change in October. Flash manufacturing purchasing manager index came in lower at 53.7 in November compared to a 54.8 reading in October and market expectations of 56.1. However with the 23 December 2014 revision of the third quarter 2014 from 3.9% to 5.0% which is not seen in 11 years since the third quarter of 2003, I am beginning to think that Fisher might be prescient in his observation. The FOMC will meet again next month from 27 to 28 January 2015. They will observe that GDP grew by 5.0% in the third quarter of 2014, at a 11 year high and agree with Fisher’s observation. During Chair Janet Yellen’s latest press conference , she had the following projection about GDP growth: The central tendency of the projections for real GDP growth is 2.3 to 2.4 percent for 2014, up a bit from the September projections.” The fact that GDP grew at such a rapid rate should persuade the Fed to raise rates at an earlier date perhaps in the March or April meetings instead of the June meeting as widely expected in the market. This would be so especially if there is continued improvement in the labor market. Hence we should keep a lookout for 09 January 2015 figures for the non-farm payroll and unemployment rate data. During the same press conference, Yellen set an unemployment target of 5.2% to 5.3% in the quote below: The central tendency of the unemployment rate projections is slightly lower than in the September projections and now stands at 5.2 to 5.3 percent at the end of next year, in line with its estimated longer-run normal level.” However I don’t think that the FOMC would start rising rates when unemployment rate is at 5.2% -5.3%. Instead I am of the opinion that they would start to rise rates as unemployment start to move towards their target as GDP grows. This would obviously be bullish on the United States Dollars (USD) after the market returns from the holiday season on the second week of 2015. Then I turned my thoughts to gold. You might have heard of this argument in one form or another before but it is worth repeating. As the US rises interest rates, it will be more expensive to hold onto gold as it gives no return and in fact cost you in terms of insurance and storage if you were to hold physical gold. Of course, there is the theory that holding gold is an insurance against the economic collapse but this is getting less and less traction especially with GDP growth of 5%. Then there is the argument that gold is a hedge against inflation but inflation is low and even the Fed foresees 1.0% to 1.6% inflation for 2015 if you refer to Yellen’s press conference. However, today I am going to offer a slight twist to it. The USD has not responded much to the record 11 year high GDP reading. You can read about it in my article ‘ USD Asleep As Q3 2014 GDP Hits 11 Years High ‘. In normal trading day, we would have seen USD raise by at least 100 pips but today if you are reading it before the market returns from the holiday, you might be in a position to short gold at a good price as gold gains partial strength by default after sustained selling in the past week with a lesser possibility of being hit by a retracement. Even if you miss the chance to sell gold by the time you read it, you can also sell it but with a wider stop loss. You can take the daily volatility as a guide. (click to enlarge) (click to enlarge) The 2 charts above shows the weekly and daily chart of XAU/USD. XAU is the symbol for gold while USD represents United States Dollar which we are all familiar with. The weekly chart shows that this pair is under constant pressure even if there are periodic upticks. The current weekly chart looks like it is on the downtrend after completing its recent bounce to a high of $1238 two weeks back. The daily chart shows us that the XAU/USD is having one of its uptick but this is likely to be temporary. This is a function of the thin trading market during the festive season and traders can take this opportunity to sell and set their stop loss at $1230. Of course, there is no sure thing in trading and one should set the position size accordingly. For those who want to avoid the leverage inherent in forex, they should use the SPDR Gold Trust ETF (NYSEARCA: GLD ) instead. GLD is listed on the New York Stock Exchange and highly liquid with $26.90 billion of market capitalization and transaction volume of 1.5 million shares. (click to enlarge) The chart above shows the weakness of the GLD after the peak 2 weeks back which is an interim retracement. Now is the time to go short the GLD as it pauses before its downtrend and catch the trend before it slowly resumes again next week.

History Shows That Silver Prices Should Start To Grow

Summary The historical analysis of the gold-silver ratio shows that silver price should start to grow. The value of the gold-silver ratio is almost 75 which is significantly above the long term average. The last two tops (2003 and 2008) were just shy of the 80 level and they were followed by significant increases of the silver price (180% and 315%). There is a significant potential of another huge gains for the iShares Silver Trust ETF shareholders. Historical analysis shows that the iShares Silver Trust ETF (NYSEARCA: SLV ) shareholders may see some interesting gains in the coming years. There are two generally recognized wisdoms that contradict each other. The first one says that the historic results are no guarantee of future performance; the second one says that only a fool repeats the same thing and expects different results. Both of them are applicable to financial markets. Although you can be never sure what the markets will do, there are some patterns that tend to repeat themselves. When you follow such a pattern there is a high probability that the performance of the asset will be similar to the previous cases. There is approximately 19 times more silver than gold in nature. This number was somehow reflected in the historical fixed gold-silver ratios. The ratio was set at 12 in the Roman Empire and at 15 during the era of bimetallism in the 19th century. Today the ratio is not fixed, but moves according to the actual gold and silver prices. The average gold-silver ratio was approximately 55 during the last 44 years. But this is only the average value, the actual values ranged from 17 in January 1980 to 97 in February 1991. The current high valuations don’t reflect the difference in the abundance of gold and silver in the nature and moreover they, don’t reflect even the difference in the abundance of the disposable mined silver and gold. Almost all of the mined gold is being hoarded and most of the mined silver is being consumed by various industrial applications. As a result there is less disposable silver than gold in the world. The GLD-SLV ratio The gold-silver ratio can be tracked also using the SPDR Gold Trust ETF (NYSEARCA: GLD ) and the iShares Silver Trust ETF. During the lifetime of both (chart below), the average GLD-SLV ratio has been 5.77. The highest value was recorded on October 10th, 2008. The GLD price of $83.22 and SLV price of $9.8 resulted in the GLD-SLV ratio of 8.49. The lowest value (3.20) was recorded on April 25th, 2011 at the GLD price of $146.87 and SLV price of $45.83. As we can see, the way from the top to the bottom took 639 trading days. During this time period GLD gained 76.5% and SLV increased by whopping 440%. On the other hand, from April 2011 to present SLV lost 67% of its value while GLD declined only by 22%. (click to enlarge) Source: own calculations The outperformance of SLV during precious metals bull markets and its underperformance during precious metals bear markets is caused by its volatility, which is significantly higher compared to gold. The chart below shows the 20-day moving coefficients of variation for GLD and SLV. The volatility of SLV is significantly higher compared to GLD, regardless of the actual market trend. Source: own calculations But the changing GLD-SLV ratio itself doesn’t tell us anything about the market direction without a further analysis. It is a ratio which means that it is impacted by the price moves of both of the assets. When the GLD-SLV ratio grows it doesn’t mean that the GLD price must grow. The ratio can grow when GLD price declines, but the SLV price must decline even stronger and vice versa. The behavior of both of the assets during particular phases of the GLD-SLV ratio development are shown by the chart below. The chart shows that the declines of the GLD-SLV ratio are related to the growth phases of the gold and silver price cycle and the increases of the ratio usually happen during the decline phases of the gold and silver price cycle. (click to enlarge) Source: own calculations The Long term picture The chart below shows the long term development of the gold-silver ratio calculated from the average monthly gold and silver prices. The chart shows the major tops and bottoms of the gold-silver ratio as well as the metal prices related to the particular local extremes (gold price : silver price). The color of the number shows whether the price of the metal increased or decreased compared to the preceding extreme. (click to enlarge) Source: own calculations Thanks to this chart we can come to three important conclusions: The most important tops of the ratio are almost always associated with a decline of the silver price. The most important bottoms of the ratio are always related with an increase of the silver price. While the direction of the silver price is quite reliably predictable (as shown by points 1. and 2.), predictions of the gold price direction based on the gold-silver ratio development are much less reliable. We can also see that the ratio is approaching 80 right now. The last two approaches to this border were followed by strong declines of the gold-silver ratio and huge silver bull runs, when the silver price increased by 180% and 315% respectively. Conclusions The historical records show that the gold-silver price ratio as well as the GLD-SLV ratio should start to decline in the coming months and years. The major declines of this ratio are always accompanied by a strong silver bull market. The current value of the ratio is approximately 75. The last two times when the ratio attacked the level of 80, the value of the ratio collapsed and silver achieved triple digit gains. If the history should repeat itself once again, the holders of physical silver, SLV or another ETF that tracks the price of the physical silver, should record significant profits. Additional disclosure: The author is long physical silver.