The post-Christmas tumble

The dollar gained against most currencies yesterday and equities and commodities declined in a sharp move following few days of a lackluster trade. The reasons for this move are not entirely clear. Some blame the news on the ECB balance sheet that rose to all time high signaling the reliance of the banking sector on the central bank. Others blame the yields on Italian debt, once again soaring above 7% for 10Y. 

But the true motives might be of a simpler nature. We had few days of a relatively calm trade and that means some tight stop-losses that were simply triggered. What is interesting, we saw the GBPUSD collapsing first with a significant lag on other markets, including EURUSD. So if there is any message from this story it says it is definitely worth watching the cable while trading on EURUSD and even equities and commodities.

Coming back to the EURUSD we are still in a mid-term downward trend and unless bulls defend the key 1,2870 level (’11 low) the 2012 will start from a sell-off as some will see the pair sinking as low as 1,1875.

Precious metals ready for a dive?

Sure it was yet again a day when the dollar advanced vs the euro, well against the most currencies and that is never positive for commodities, especially precious metals. But the strength of the greenback only partially explains a weakness in prices of gold and (especially) silver as of late. Clearly something has change and while market consensus still sees gold at ca. 2000 USD at the end of 2012, it is obvious that not everyone sees lower prices of gold as a buy opportunity anymore.

That will make a retest of a (3y old!) trend line very interesting. Thus far the line seemed to be bullet proof as the price bounced off and up from it numerously. However, this time there is plenty of arguments for the price to dive deeper:

-       The key argument is the one of a fundamental nature – in the third quarter of this year the investment demand (ETFs, bars and coins) contributed a stunning 45% of the aggregate – this whole buying spree was made with a hope of selling the shiny thing at higher prices. Meanwhile the “real” demand (jewelry and industrial) remained weak    

-       It seems like we will not see major money printing operations in the foreseeable futures and those fueled the gold hype

-       Gold failed to score a new high after a previous correction which means that moving below 1532 will give us a technical confirmation of a bearish trend (a lower high and a subsequent lower low)

Things are not looking good on silver too. The price is heading towards 26,10 USD per ounce which is a very strong level. Should it be broken we may see silver collapsing to 19,50 USD in a span of few weeks.

Przemysław Kwiecień PhD, Chief Economist

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