It's been a tough read on precious metals throughout the whole US-Iran conflict. In more normal circumstances, you would think geopolitical tensions would buff demand for precious metals. Instead, we're seeing the complete opposite this time around. There are a couple of reasons for that of course.
The first of course is the inflation shock. Higher oil and gas prices are causing a major rethink for central banks, shifting rate expectations to favour interest rate increases instead. For the past two years, gold and silver have benefited greatly from central banks cutting interest rates and that was also the market position/view up until February at least.
The next is the leveraged volatility from traders piling into precious metals over the past eight months or so. All before this happened, just about everyone wanted a piece of precious metals. And the consensus trade got so out of hand that we even saw a forced correction at the end of January, one that was perhaps overdue.
So when you put in a dash for cash as hedge funds and other big market players are forced to liquidate stocks and bonds, leveraged trades are the first to go. And this time around, that comes from the likes of gold and silver. I've been warning about this for a couple of weeks already.
As such, the turn in the market sentiment today after Trump's address fits with the return of selling in precious metals. Silver is now down over 5% as we see sellers keep a hold of a key technical level this week too:
The 100-day moving average (red line) is the key line in the sand and that is where sellers are making their stand. There is still some work to get through to the next downside leg though. A daily close below $65 would be a good start before taking aim at the 200-day moving average (blue line).
As the central bank rhetoric shifts, it does take away a major tailwind for precious metals. But once this episode passes and central banks do what they need to do in order to address inflation, there will come a time when we transition back to heavier buying in gold and silver again. That is provided all else being equal in broader market sentiment and economic developments.
And even when you factor in everything that is happening, silver is still down less than 1% year-to-date and up over 93% since July last year. That's not too bad even if we have seen a climb down of around 42% from the highs in January.
