Commodities & Metals

Have Silver and Gold Already Fully Priced in Fed Bond Tapering?

If you had questions about the “if and when” of the tapering of the $85 billion in bond purchases in quantitative easing, the answer is looking more and more clear that it will begin later in 2013 and that the bond buying will end in the middle of 2014. Silver and gold have been victims of rising interest rates, even if there has been some effort from the World Gold Council to show why this time may be different about rising rates and precious metals. Now we have yet another report showing that silver and gold already may have discounted the impact of the bond purchase tapering.

ETF Securities showed that gold and silver have risen despite spikes in U.S. bond yields and despite a stronger dollar. To show just how much the rise is, the price of silver is up by 27% in the past eight weeks. The price of gold has risen by 14% since its lows in early July. Monday’s report from ETF Securities shows that precious metals took the latest release of the Fed’s FOMC minutes in stride as both gold and silver rose last week. It said:

U.S. 10-year yields and the gold price are now trading more or less around the same levels they were in November of 2010, when QE2 was first announced. The 2013 correction in precious metals prices has attracted substantial physical demand, notably strategic buying by China. This demand surge, combined with a sharp decline in recycled gold supply and diminishing mining productivity, appears to be forming a solid foundation for the gold price.

Another point that was brought up is that September historically has been the best month for gold investors, gaining about 3% since 1990 and gaining about 2.5% if you go back to 1972.

ETF Securities showed that silver ETF holdings actually have reached a new high, some 644 million ounces as of August 21. Some of the reasons driving this were as follows:

  • An unprecedented period of negative gold swap and forward rates
  • The longest period of gold futures backwardation in history
  • Record physical gold demand from China
  • Record U.S. Mint silver coin sales
  • A new record high in total silver ETF holdings

The 644 million ounces translates to some 83% of 2012 total mine supply. With gold production at 87 million ounces in 2012, net gold demand from India and China for 2013 was put above 30 million ounces. Despite curbs and despite a bad economy, gold demand in Indian is also expected to remain robust.

So, have silver and gold formed a notable bottom? If this is correct then perhaps so, although we would not be expecting any immediate challenges to the highs of the last year.

Gold has tried to challenge $1,400 per ounce again, but currently the price of gold is down $3.80 at $13.90. Silver is currently up $0.09 at $24.17 per ounce.