As a long term investor, coin collector, coin dealer and follower of precious metals, I’ve seen a number of different markets over the past couple of decades and am fairly familiar with the various factors that affect different markets. In fact, I’ve previously written a number of articles on this site and for Coin Week discussing the markets, how they’re influenced, and why I’m bullish on gold and silver for the long term. There’s no doubt, in my opinion, that the long term prospects of gold and silver are very promising, but below are several reasons why I believe that attempting to forecast short term movements in the markets, which are oftentimes influenced by noise, are for the most part an exercise in futility.
Over the past few weeks, we’ve heard from several Fed presidents who have weighed in on the timeline for tapering, all of whom have different opinions. Dennis Lockhart, Atlanta’s Fed President, and Richard Fisher, Dallas’ Fed President, have recently warned that continued quantitative easing may be detrimental to the health of the economy. On the other hand, John Williams, San Francisco’s Fed President, is of the same opinion as Janet Yellen in that we should continue with the Fed’s loose monetary policies until it’s clear that the economy is on a firm foundation. Markets tend to move in response to Fed statements, so as you would expect, we’ve seen a good bit of short term volatility in the markets following statements made by the above Fed Presidents.
In previous months, BLS jobs reports had a significant effect on the price of gold and silver. Historically speaking, if the previous month’s jobs reports fell short of expectations, the value of the dollar would typically drop and the price of gold and silver would rise. Alternatively, if newly created jobs exceeded expectations, the dollar would typically strengthen and gold and silver would drop in price. The idea behind these price movements is that stronger than expected employment figures is an indicator that the economy is strengthening, which means that the Fed is more likely to tighten their monetary policy, while disappointing jobs data is an indication that the economy is still struggling; increasing the probability that the Fed will continue with its loose monetary policies.
This month, as well as in recent months, the status quo has not held true. Last Wednesday, ADP reported private sector job growth of 215,000 new jobs , while the BLS’ data, which was released last Friday, reported that 203,000 new jobs were created during November. This surpassed economists’ forecasts of 180,000 new jobs for November. This better than expected data typically would cause gold and silver prices to plunge; however, we have surprisingly seen positive movement in the gold and silver markets following the release of November’s jobs data.
Debt Ceiling Issues
Another recent example of contrarian price movements in the gold and silver markets revolved around the debt ceiling crisis. A number of pundits, including large investment banks such as Goldman Sachs, forecasted a pullback in the precious metals market if and/or when Congress reached a resolution on the debt ceiling issue. However, rather than fall off a cliff, the price of gold and silver saw one of its strongest rallies of the year following the announcement that a compromise had been reached.
The prevailing thought was that gold and silver serve as a hedge against financial and economic crises, including general uncertainty, so as long as Congress was battling over increasing the debt ceiling, gold and silver would continue to perform well. However, what they didn’t take into consideration is that raising the debt ceiling, without placing a cap on government spending until February of next year, will ultimately harm the economy by increasing our debt and will likely require the Fed to continue their bond purchasing program to keep interest rates low.
As we indicated above in our three examples, attempting to predict the short term movements in the gold and silver markets is nearly impossible to do, as there’s a good bit of noise to wade through and the markets don’t always tend to move in the direction that you predict. Rather, we’re of the opinion that you should view gold and silver as a long term investment. Considering that many nations appear to be moving away from the dollar; potentially threatening the dollar’s position as the world reserve currency, annual deficits of nearly $1 trillion a year and a ballooning national debt, as well as the Fed’s record level asset base of nearly $4 trillion, we believe that the long term prospects for gold and silver continue to be strong; regardless of short term movements in the market.