Gold News

Technicals, Fundamentals & Negative Rates

Traders small a banking crisis in Italy, pile into gold, silver, Yen and bonds...

TRADERS are used to operating in highly uncertain and volatile markets, writes Gary Dorsch at Global Money Trends.

There are so many moving parts, which makes forecasting the future so extremely difficult and hazardous. From day to day, the pendulum of market sentiment often swings from euphoria to depressive, but traders must keep their emotions under control. Uncertainties always exist. Even the brightest of analysts cannot predict future events, and more importantly, how investors will react to those events. So decisions must be made through judgment about the probabilities of potential outcomes, rather than doing predictive investing.

There are so many forces and imponderables that affect the outlook, that one must keep a very open mind and not get trapped in a fixed mindset. Too many traders lock themselves into either a bullish or bearish view and that undermines their willingness and ability to take account of a changing environment.

It is important to never become overly confident that you have it all figured out, and don't place too much confidence in any bet for the next 12-months.

There are two ways of gauging the markets. A "fundamentalist" studies the cause of market movement, while a "technician" studies the effect on prices. Most market traders classify themselves as either technicians or fundamentalists. In reality, there is a lot of overlap.

Most fundamentalists have a working knowledge of the basic tenets of chart analysis. At the same time, most technicians have at least a passing awareness of the fundamentals. The problem is that the charts and fundamentals are often in conflict with each other.

Usually at the beginning of important market moves, the fundamentals do not explain or support what the market seems to be doing. It is at these critical times in the trend that these two approaches seem to differ the most. Usually they come back into sync at some point, but often too late for the trader to act. One explanation for these seeming discrepancies is that market price tends to lead the known fundamentals. Stated another way, market price acts as a leading indicator of the fundamentals and or the conventional wisdom of the moment.

While the known fundamentals have already been discounted and are already "in the market," prices are now reacting to the unknown fundamentals. Some of the most dramatic market movements in history have begun with little or no perceived change in the fundamentals. By the time those changes became known, the new trend was well underway.

Such has been the case for the past year, in which diverse markets, such as the Italian banking sector index, the Swiss government bond market, and the precious metals, have been playing off each other, and reacting to the same set of fundamentals. After suffering through a brutal 4.5-year bear market, the price of gold and silver are now said to be in the throes of the early stage of a bullish market cycle that could last for several years, and eventually allow the gold market to revisit its all-time high set in August 20111 at the $1921 per ounce level.

The driving force behind the recent rally in precious metal prices is the once unthinkable situation of "negative" interest rates, which is spreading throughout Europe and Japan.

Based on the June 30th Fitch Ratings report, there is $11.7 trillion worth of sovereign bonds that are yielding less than zero%, including $7.9 trillion in Japan alone. This is a 12.5% increase from just four weeks prior.

Furthermore, Fitch Ratings' report also signals that bond buyers are willing to hold negative-yielding debt for even longer periods of time. Negative-yield debt with maturities of seven or more years totaled $2.6 trillion in the latest report, which is almost double the amount from April.

 The Swiss government was the first to cross the threshold into negative territory, and a key strategy to prevent the Swiss franc from climbing sharply higher against other currencies. The yield on Switzerland's 2-year note have been submerged at the world's lowest depths at -105-basis points today. Yet on July 5th, eyebrows were raised and the imagination was stretched to the limits, when the yield on Switzerland's 50-year government bond fell below zero for the first time, meaning all Swiss sovereign borrowing costs out to half a century are now negative. The milestone has been triggered by a global rally in bonds that has also pushed all of Germany's debt out to 15-years, and Japan's bond yields out to 20-years, to below zero%, and Britain's and Canada's 10-year yields to below 1%.

Beneath the surface is a ticking time bomb, although the culprit – Italy's crippled banking sector is not on many traders' radar screens. Shaky banks, this time in Italy, are again threatening to roil Europe's economy, as shock waves from Britain's vote to leave the European Union adds to the explosive cocktail mix.

Italy's bank shares plunged to their lowest depths since the Great Recession in March 2009, this week, shaking the financial foundations of the Euro zone's third-largest economy and threatening contagion to other EU nations. The crisis could push Italy back into recession and, in a doomsday scenario, generate a Greek-type meltdown that Europe would find almost impossible to contain.

Italy's bank sector index has fallen -32% since Britain voted on June 23rd to quit the European Union, bringing its losses over the past 12-months to -60%. The Eurozone banking stocks index has dropped -22% and -37% respectively. Italy's banks have been worn down by some €360 billion ($400 billion) in non-performing loans that won't be paid back in full, as well as low interest rates, which squeeze the difference between bank borrowing costs and lending rates – their fundamental way of making money.

The country's third-largest lender, Banca Monte dei Paschi di Siena, has been ordered by the European Central Bank to sharply reduce its load of bad loans, and has until October to come up with a plan to do that. The bank has already tapped investors several times for more money. Its shares have plunged to €0.28 cents year from €1.28 at the start of the year.

Banks elsewhere are under pressure as well. In particular, Deutsche Bank, Germany's biggest, has struggled to overcome the drag on profits from turbulent markets, high costs, and big payouts to settle lawsuits. The IMF recently named Deutsche Bank as the single biggest net contributor of risk to the global financial system, among 29 big banks designated as globally significant.

Shares of Credit Suisse meanwhile fell to a 7-year low last week. As such, many depositors are pulling their money out of the European banking system, and placing some of the cash into gold and Swiss government bonds, as a safe haven trade. Speculators in China are piling into the silver market, in a belated catch-up with the gold market.

In New York, silver rose to an intra-day peak of $21.13 per ounce, its highest value since July 2014, as the futures and physical silver contracts on the Shanghai Futures Exchange also skyrocketed, for a fourth straight session on July 4th, with the front month contract hitting its +6% daily maximum at opening to reach CNY 4,419 per kilogram.

Silver futures climbed 23% in June, and are 31% higher year-to-date. Trading in the December silver futures contract in Shanghai reached nearly CNY 95 billion on July 1st, compared with CNY 50 billion in the session before, or more than four times the daily transaction volume of a month ago.

GARY DORSCH is editor of the Global Money Trends newsletter. He worked as chief financial futures analyst for three clearing firms on the trading floor of the Chicago Mercantile Exchange before moving to the US and foreign equities trading desk of Charles Schwab and Co.

There he traded across 45 different exchanges, including Australia, Canada, Japan, Hong Kong, the Eurozone, London, Toronto, South Africa, Mexico and New Zealand. With extensive experience of forex, US high grade and corporate junk bonds, foreign government bonds, gold stocks, ADRs, a wide range of US equities and options as well as Canadian oil trusts, he wrote from 2000 to Sept. '05 a weekly newsletter, Foreign Currency Trends, for Charles Schwab's Global Investment department.

See the full archive of Gary Dorsch.


Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

Follow Us

Facebook Youtube Twitter LinkedIn



Market Fundamentals