Tuesday, October 6, 2009

Silver v. Currencies

The "everything is up but the Dollar trade" is getting a little bit ridiculous and a little bit frothy.

Figure 1 is a weekly chart of a continuous silver contract. The indicator in the lower panel measures silver's 52 week performance relative to a basket of 8 currencies.Those currencies are: 1) Australian Dollar; 2) Canadian Dollar; 3) Swiss Franc; 4) Eurodollar; 5) British Pound; 6) Singaporean Dollar; 7) Japanese Yen; 8) US Dollar. Relative to these currencies, silver has been outperforming to an extreme degree. Since 2004, such extreme out performance has led to intermediate term highs in silver. Furthermore, silver is at the upper end of a well defined up trend channel.

Figure 1. Silver v. Currencies/ weekly

How do I square this analysis, which suggests froth in metals, with the "breakout" in gold? I don't and I can't. Maybe the move in metals is overdone; maybe it isn't. Trends take time to play out, and prices don't get to their destination all in one day or one week. I don't have an answer. This is why it is called trading as in there are trade offs.

1 comment:

dacian said...


How do I square this analysis, which suggests froth in metals, with the "breakout" in gold?

From a fundamental point of view (as far as I can understand), gold is trading like it's money. Gold went up in 2008 because it's the last safe haven (only gold the metal, not gold stocks, silver, etc.) Silver is more an industrial metal (it's about perception). Other forms of money are US treasuries or paper money (USD for instance).

If the deflation trade is back, gold might go up, other metals down; last year there was a drawdown in gold before moving back higher due to hedge fund leverage in the gold market.

Here is a simple point of view (not an expert at all) which might explain gold moving up (this is a credit based recession, and gold does well in credit stressed environments - sometime ago I commented here that gold is a bad measure for inflation actually contrary to popular belief; it's a good measure for stress, be it deflation or hyperinflation).

But my point of view can't explain your call for a slide in the USD; the old green should do well in deflations (it was the case in 2008) but wasn't the case in 2009; this is for sure the biggest reflation the world experienced to date due to the most brutal intervention by goverments around the globe in the markets. Let's see how things will play out next...