Gold News

Silver Really Is The Devil's Metal...

Monday's new 5-year low was immediately followed by a near 20% surge...
NO WONDER they call it the devil's metal, writes Greg Canavan in The Daily Reckoning Australia.
Silver, that is. In the space of 24 hours, it opened Monday's Asian trade at $15.39, went as low as $14.15 and as high as $16.81, before finally closing the US session at $16.69.
That is a wild ride. There will be some shell-shocked traders after that little session.
From top to bottom, that's a range of nearly 24 hours.
To put the silver move into perspective, gold traded in a massive $80 range...but that only represented a move of 7%. If it were to match silver, you'd need to see a trading range of nearly $200!
So if you're still on the silver horse, you've either got nerves of steel or you're blissfully ignorant – or a bit of both.
The action in precious metals shares in Australia was emblematic of the panic going on across the whole commodity complex. I haven't seen that type of panic selling since the dark days of 2008. It was pure fear.
Bottom pickers should start to come into the market now, as Monday's carnage certainly shook many weak hands out of their positions. Whether it's a lasting bottom is impossible to tell. We'll only know in hindsight. But there could be room for a bit of a rally before more sellers come and take profits.
Of course, these wild moves are all about the currency markets. The US Dollar was weak after the initial bullion panic, and everything non-Dollarish (including commodities) all did well.
This rising volatility is the result of the currency wars. And as the years unfold, it's only going to get worse.
For the Australian Dollar, there is one strong hint why the next move in interest rates will be down, not up. The explains why:
"Bets are mounting that weakness in both Australia and the global economy could force the Reserve Bank of Australia to cut rates within 12 months, despite an almost-consensus view among bank-based economists that the RBA's next move is up."
Hang on...Australia is in the middle of one of its greatest terms of trade crashes ever [and nearly every single bank economist thinks rates will be higher next year? What are they teaching these people at uni, seriously?
Here's a tip, people. It is very unlikely that the RBA would ever raise rates into a crashing terms of trade. It just wouldn't make sense. You don't need an economics degree to know that...only a modicum of common sense.
A falling terms of trade means exports are earning less relative to imports. That reduces national income. This means that, at an aggregate level, disposable incomes are falling.
Do they really think the RBA is going to add to that reduction in disposable incomes by raising rates? Of course not. Why did rates fall by so much from 2011 to 2013? It was because of the first leg down in Australia's terms of trade after they rose for more than a decade.
The nasty side-effect of this interest rate cutting cycle was a booming housing market...mostly centred around Sydney and Melbourne. On the plus side, it did increase dwelling approvals to a cyclical high (meaning more supply will come into the market in the years ahead), but the house price speculation that came with it could prove destabilising for the economy if it continues to get out of hand.
Another round of interest rate cuts could well do that. So my guess is that the RBA won't move on interest rates until there is some movement on the 'macroprudential' front. This refers to changes to rules or regulations that could curb investor speculation, or make banks hold more capital against certain types of loans.
And don't forget the Murray Report is currently in the hands of the government. This is likely to recommend changes to the financial system that will at least stem the flow of credit to the housing sector.
Speaking of house prices, you're seeing increasing signs that price gains are beginning to cool. Monday, RP Data reported that for the month of November average capital city prices fell 0.3%. On a year-on-year basis, they're still up 8.5%, but the rate of growth is slowing.
More importantly, the returns are nearly all coming from Sydney (up 13.2% yoy) and Melbourne (up 8.3% yoy). Bad luck for the rest of Australia. I'm not sure how that wealth effect theory is going to play out.
Which is a bit of a worry for the RBA. The whole rate cutting rationale was to create a housing boom (as in construction and consumption) to offset the faltering mining boom. As we head into 2015, that doesn't look like it'll happen. Construction activity looks to have peaked, and consumers aren't exactly champing at the bit, are they?
That's what happens when you base an economy around a flawed investment idea (China will soak up our commodities at high prices forever) and leverage that short term income gain on property speculation.
It leaves you desperate for lower and lower interest rates when growth slows – because in a structurally weak economy, there's no real other answer. The government could get serious about reform, but that's too hard. Better to kick the can down the road and hope something will turn up.

Greg Canavan is editorial director of Fat Tail Investment Research and has been a regular guest on CNBC, ABC and BoardRoomRadio, as well as a contributor to publications as diverse as and the Sydney Morning Herald.

See the full archive of Greg Canavan.

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