The price action in gold and silver caught my eye yesterday morning. Both metals broke down to 1 month lows after yesterday’s early selling, which looked like stops getting hit rather than any proximate news. Despite the decline, silver is still holding important, multiyear support:
The 20-21 price level is crucial. The decline below that area in June still looks like a false breakdown, though any more weakness and that scenario is out the window. Gold has been stronger from a long-term perspective, not coming anywhere near its 2008 high on the recent decline:
There are some short-term signs that might be indicative of a bounce (with Market Anthropology’s recent blog post and J.C. Parets’ separate post both detailing some of those). Overall, I’d prefer to just stay away.
Gold and silver’s price action over the last couple years interests me mainly because of the argument that is frequently proffered these days about central banks’ QE providing an endless bid to stocks.
Here’s the thing – if QE took away all stock risk, why has it only worked on U.S. stocks? Why have various emerging market stocks, the majority of commodities, and many sovereign bond markets fallen by the wayside in a time of “infinite” money, at a time when it is so easy to move money among asset classes around the world?
To me, that should be proof enough that QE has much more of a psychological impact than anything else. Global asset prices as a whole are likely higher than they would otherwise be if there was no QE. But QE by itself does not mean stocks cannot go down. It’s a false, but convenient, narrative. Just like gold and silver have declined over the past 2 years in spite of more and more QE, stocks can behave just the same. Trust in QE at your own risk.