Macro Wrap – $GLD and $SLV and Money Printing

by Enis April 4, 2013 8:05 am • Commentary

Gold and silver have had a rough week, but I when I first read the headlines from overnight this morning, I figured they’d at least be higher today.  That’s because the main news overnight was that the Bank of Japan’s aggressive new easing plan.  Among the new measures:

  • Doubling of monthly bond purchases with the intent of targeting higher inflation.
  • Doubling the monetary base in two years (includes currency in circulation and bank reserves at the BoJ), which was also a new development, as its previous target was the overnight interest rate, rather than the actual monetary base.
  • Increase the average maturity of the bonds the BoJ buys from less than 3 years today to about 7 years
  • Increase the BoJ’s holdings of ETFs and REITs by 1 trillion yen (about $10 billion) and 30 billion yen (about $300 million) per year respectively

These are some incredible measures from the BoJ, as their new monthly bond purchase plan is up to almost $80 billion per month, very close to the size of the Fed’s program, even though Japan’s economy is only about 40% the size of the U.S.

The yen fell 2.5% against the dollar overnight, and the Nikkei went from down 1.5% intraday to close up 2.2% on the day, near its highs of the year.  But what most surprised me was the price action in gold and silver.

Both precious metals are already quite oversold, and this sort of money printing news is a clear catalyst for them to move higher.  Instead, they were barely able to rally on the news, and are now trading lower than yesterday’s close.  As I mentioned in my Monday post, central bank money-printing might not be the simple boost to ALL asset prices that the market assume it will be.

Rather, gold and silver are close to making long-term breakdowns of key support levels.  Here is the 3 year daily chart of GLD:

3 year daily chart of GLD, Courtesy of Bloomberg
3 year daily chart of GLD, Courtesy of Bloomberg

I’ve drawn a red line at the crucial support level at $148.  That support has held multiple times since 2011, but if it breaks, the next support level is $140, which was resistance in late 2010.

Meanwhile, SLV’s support level of $25 is arguably even more important than $148 in GLD, since SLV does not have further support until around $20:

3 year daily chart of SLV, Courtesy of Bloomberg
3 year daily chart of SLV, Courtesy of Bloomberg

The charts speak for themselves.  Precious metals are at a critical juncture.

The key takeaway I have with regards to all financial markets is that central banks are no savior.  Investment theses based should not be based solely on their policies.  Keep in mind for the future that the emperor might have no clothes.  Because sooner or later, calls for the emperor’s saving grace reach will once again reach a fevered pitch.