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Gold and silver have both rallied spectacularly this year. The two were trading at multi-year lows in mid-December 2015 with many analysts predicting further losses to come. However, both put in double bottoms and these, together with a pull-back in the US dollar, set the stage for a dramatic turnaround.

It helped that 2016 kicked off with a rout in equities and other risk assets as the Chinese stock market slumped for a second time within six months. There was a further devaluation in the yuan which spooked markets and had investors rushing to safe havens. Even as stock markets recovered, gold and silver continued to rally. Finally, the four and a half year bear market was over. This had seen gold fall by 45% from its high of $1,920 in August 2011 and silver plunge 72% from just under $50 in April the same year to their respective lows of $1,046 and $13.64 in December 2015.

The rally in both metals appeared to stall in early May as both pulled back sharply from multi-year highs. However, last month’s referendum when the UK voted to leave the European Union saw both metals fly higher again. May’s sell-off now looks like nothing more than a healthy correction which allowed both metals to consolidate and create the foundations for another surge higher.

So what’s next for the two precious metals? Both have pulled back today with silver down over 2% at one stage. This sell-off has seen silver break below $20 – a level which appeared to be holding as support for the metal. That could still be the case if silver manages to close above here in tonight’s session. However, it does look as if investors are booking profits in the two metals following substantial gains. Looking at the charts it shouldn’t come as a surprise if both gold and silver pull back further over the summer.

Here’s the daily chart for silver. If $20 can’t hold, then we could see it head back down to support around $18

PM Bulletin

And here’s the daily chart for gold with major support around $1,300:

PM Bulleitn

As to the fundamentals, gold and silver should continue to make gains in the current zero-to-negative rate environment. Neither precious metal pays a yield or dividend unlike a bond or equity. However, this becomes less of an issue when over $10 trillion of sovereign bonds have negative yields and when investors are paying record prices for equities (US) in a low-growth deflationary world. On top of this we have the US Federal Reserve unwilling (or unable) to tighten monetary policy further with the Bank of Japan apparently considering adopting “Helicopter Money”.  If this situation persists, then precious metals should continue to find support going forward.

David: May’s sell-off now looks like nothing more than a healthy correction which allowed both metals to consolidate and create the foundations for another surge higher.

Disclaimer:

Spread Co is an execution only service provider. The material on this page is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by Spread Co Ltd or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

 

Posted by David Morrison

Tagged: Bulletin

Category: PM Bulletin


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