A precious metals wholesale trader issued a commentary on the metals’ price decline this week. He cited three reasons for the drop: 1) calmer voices about Ukraine, 2) higher than expected durable goods orders, and 3) improved consumer sentiment.
I think that he may have missed the real reason for the metals’ decline: the huge success of the “Euroskeptics” who voted in nationalistic candidates that are diametrically opposite those who are working for the dream of a unified Europe. In elections across the Eurozone, Euroskeptics bested every conventional party in France, Great Britain, Denmark, and Greece, and posted notable scores in Sweden, Germany, Hungary and elsewhere.
Here’s the underlying fear: the Eurozone may go away. Not tomorrow, but sometime in the future.
So, what do you do if you’re invested in a currency issued by an entity that may not exist in a few years? You trade your euros for dollars, causing the euro to fall and the dollar to rise. The move to dollars resulted in 10-year treasuries rising to where they yielded 2.44%.
Unfortunately for precious metals investors, presently gold and silver trade against the dollar. When the dollar falls, gold and silver go up; but, when the dollar rises, the metals drop.
At some point, enough investors will recognize that fiat currencies eventually fail and start evaluating the projected life of the dollar. Meanwhile, though, the dollar is the best looking horse in the glue factory. But when the dollar gets a thorough scrutiny as the true state of financial affairs in the US come back into the limelight, investors will bail and many of them will go into the metals.
Yes, the dollar rose relative to gold, but so did the euro during the same time period. So it would seem there must be more to the story.