The "Waterloo" of gold and silver?
The gold and silver markets have recently experienced significant volatility, with gold futures plunging nearly 6% and silver futures dropping over 7%, marking the worst single-day performance in over a decade. Although the market had previously benefited from the Federal Reserve's easing policies and rising dollar credit, the recent phenomenon of gold and silver rising alongside stocks has overturned traditional logic. Expectations of easing geopolitical tensions may be a triggering factor. The silver market shows characteristics of a short squeeze, with attention on the shortage of physical silver. Overall, the simultaneous rise of gold and silver with U.S. stocks is considered unsustainable, and future trends may involve a rebound of the dollar along with adjustments in gold and silver/U.S. stocks
After a big rise, there is often a big drop, especially when the rise is "incomprehensible," which is a classic rule of the capital market. This scene has also appeared recently with the hot commodities of gold and silver. Last night, gold futures plummeted nearly 6%, and silver futures fell over 7%, marking the worst single-day performance in over a decade, and this was the second significant drop following last Friday.
If the previous rise could be explained by the market's expectations of the Federal Reserve's overly loose monetary policy in the face of inflation, the credibility of the dollar, and the government shutdown, the recent simultaneous rise of gold and risk assets like stocks, without any fear of the dollar's rebound, somewhat overturns traditional logic.
The direct triggering factors for last night's drop are not very clear, but it may be due to the continued easing of geopolitical tensions, such as the previous China-U.S. relations and the recent Russia-Ukraine issue. Although yesterday, Europe and the U.S. did show some leniency regarding the territorial issues in Russia-Ukraine, Russia has not accepted:
Trump's public "suggestion" is: a ceasefire between Russia and Ukraine, stopping at the current front lines, and reaching an agreement to declare victory on both sides.
Several European leaders issued a joint statement expressing "strong support" for U.S. President Trump's position on the Ukraine issue, namely that Russia and Ukraine should immediately cease fire, using the current front lines as the starting point for negotiations.
Looking at the recent trends in gold and silver, this drop seems more like a "tide retreat" of emotional acceleration, which is more evident in silver (London silver):
Since last Friday, after a two-day drop, silver has basically retraced the gains made since October 9.
This round of silver market has obvious short squeeze characteristics. Since October 9, after silver broke through the $50 mark, the market began to focus on the shortage in the spot market. Subsequently, silver prices continued to soar, with leasing rates rising above 30%, exacerbating the supply-demand imbalance. After October 13, this round of "short squeeze" continued to accelerate until it peaked and fell last Friday.
The continued downward space depends on whether the underlying logic has reversed and whether the capital allocation thinking will change significantly, which lacks a foundation before the U.S. economic data "returns."
Of course, regarding the recent abnormal market combination, our view remains consistent: this round of "U.S. stocks (especially tech stocks) + gold and silver + dollar" rising together is unsustainable:
For the subsequent trend, we are more inclined to believe in a "short-term rebound of the US dollar + adjustment of gold and silver/US stocks":
In recent days, precious metals with larger gains have taken the lead. Looking at recent years, for precious metals to rise and then stabilize, they must at least break below the 20-day moving average; silver has already done so, while gold has not yet.
However, US stocks are expected to show some resilience due to the third-quarter reports and Trump's "verbal defense."
We tend to believe that during the vacuum period of US economic data, the current adjustment of gold and silver is mainly about "de-leveraging" and cooling down. The narrative support behind it still exists, but after the data "returns," there may very well be a second wave of adjustment.
Author of this article: Shao Xiang, Source: Chuan Yue Global Macro, Original title: "The 'Waterloo' of Gold and Silver? (Minsheng Macro Shao Xiang)"
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