Expect Volatility in the Silver Price to Persist

It was a mixed day here in St. Louis as the clouds and rain finally gave way to sunshine as I left the office last night. The same can be said about the markets, with currencies rising on the day while commodities traded lower. All of the currencies, except for the pound sterling (GBP), ended the day in the positive column, but gold and silver just couldn’t shake the fog. The up and down trading Chuck talked about yesterday stayed with us, but silver had the most volatility.

When trading opened in the US, silver was still holding on to the $46 handle but fell all the way down to $44.6550 before finally ending the day above $45. Volatility in silver is historically higher than gold simply because the market is smaller but other players have entered into the volatility equation as well. The huge run up in silver and $1,500 gold has attracted a new breed of investor, so volume has picked up significantly.

The relatively large price swings encouraged quite a bit more trading as opposed to the classic buy and hold investors who are using silver as a longer term inflation hedge. Since it hasn’t broken through that all-important line in the sand of $50, I think there was a bit of disappointment floating around, which encouraged some to take profits. In addition to those feelings of disappointment, there have also been thoughts of some type of correction swirling around the markets, which has some traders anxious as well. The bottom line is, expect this type of volatility to persist for a while.

Before I head into the currencies, let’s touch on the data releases in the US economy. We saw the results of the February S&P/Case-Shiller home price index and showed yet another decline. The index fell to 139.27, which was a 3.33% year over year drop, and was worse than what most economists had expected. In fact, we came dangerously close to eclipsing the six-year low that we saw back in April 2009. As home prices have fallen and can’t get up, calls for a double dip in housing are again becoming a grave concern.

There has been very little, if any, good news about the housing industry and the responsible factors don’t show any signs of easing. The supply of homes continuing to mount from foreclosures, homebuyers either not qualifying for loans or underwater to the point that they are handcuffed, a lack of sustainable and material job creation, and general economic uncertainty all point to a continuation of this trend. We even had Geithner seemingly throw his hand up in the air when he said that we’re just at the beginning of trying to figure out how to fix the mess.

Speaking of Geithner, Chuck sent me some thoughts last night…

“I saw a report yesterday that said, ‘Treasury Secretary Timothy Geithner said the US will never embrace a strategy to try to weaken the dollar for global trade advantage.’

“Hmmm… If that’s so, then why does he back his buddy, Ben Bernanke and his zero interest rates, his money printing, or debt monetization (A.K.A. quantitative easing 1&2)? Does he truly believe that those are things that would support the dollar? I hardly think so, folks… But it makes for good copy, eh?”

Thanks again, Chuck.

In the same breath, we also had April consumer confidence rise to a figure of 65.4 from March’s 63.8 showing. Just to give some perspective, the report averaged around 97 in the past expansion period so we are well below what would be considered good times. Having said that, I’m at a loss right now. Looking at all of the negative wealth created from the housing mess, sky high food and gas prices, unemployment at close to 9% (according to the government), a sluggish overall economy, and not much in the way of comforting news, I just don’t see much to be confident about.

While consumer confidence is still very fragile, it just goes to show you how important the stock market really is when it comes to this figure. I know the labor market has shown signs of improvement, but nothing sustainable at this point. Never mind the fact that jobless claims are still hovering around 400K and companies such as McDonald’s and Wal-Mart are warning of price increases. It seems like as long as we see our stock portfolio values rise, we can put the other things aside for the moment. I’m all for being confident, but I need a nice strong foundation before I walk across that bridge.

Today is going to be a big day in the data department. We’ll not only see the results of durable goods, of which manufacturing has been the glue holding the pieces together, but we also get the FOMC rate decision. Nobody is really looking at the interest rate, as it won’t move, but all eyes are on Bernanke and what he says at the press conference following the meeting. This will be the market mover today and his comments about QE2 will garner all of the focus, so I’ll have more on that tomorrow.

Moving over to the currency market, the dollar was sold pretty much across the board on thoughts the Fed will not only reiterate its stance to keep rates low for an extended period but also carry out the remainder of QE2 without any type of reduction. As long as Bernanke doesn’t throw us any curveballs, risk appetite should remain strong and investors should continue looking for higher yields elsewhere, which would perpetuate the bias to sell dollars.

There was a tie for the best performing currency yesterday as both the New Zealand dollar (NZD) and the South African rand (ZAR) both appreciated just under 1%. It looks as though the carry trade may have been the wind behind their sails, but thoughts that New Zealand will continue to recover as global growth continues to rise provided the foundation. The kiwi got another boost from the spillover effect of the Aussie trading just under 1.08. Interest rates aren’t expected to move anytime soon as the economy still remains in a fragile state and inflation remains tame, so its ratio to the Australian dollar (AUD) could have a larger influence on the direction of the currency.

I guess I should talk about the Aussie since I’m already there. We saw the currency trade at yet another record yesterday as it rose all the way to 1.0797. We have the first quarter inflation report due today so any signs of a pickup in consumer prices will just put additional pressure on the RBA to raise rates. We already have the strong labor market applying pressure in the way of wage inflation, so CPI would either advocate an imminent rate hike or push one out until later in the year.

The Norwegian krone (NOK) received the bronze medal as it came in third place by rising about 0.75% on the day. The same drivers were at work, in that it’s a commodity-based currency with interest rates projected to move higher. Throw in oil remaining at triple-digit levels and a higher euro, and you have the recipe for appreciation. Oh, and don’t forget its one of the most fundamentally sound economies in the world.

The Swiss franc (CHF), which is the best performing currency over the past year, appreciated yet again by rising over 0.50%. This time it wasn’t safe haven buying that sparked a rise but instead exports showing an increase in the first quarter. Adjusted foreign sales rose 6.1% from last quarter as increased demand from Asia and the Eurozone are adding to the Swiss economic momentum. The Swiss government raised its 2011 export forecast to 4.1% from 2.6% and is expected to climb even though the franc has continued to rise.

Other than that, most of the other currencies were either at breakeven or showed a modest appreciation. The pound sterling came in at a slight loss as factory orders fell in April and doubts continue mounting that interest rates will increase even though inflation is running well above their target. We get the initial report of first quarter GDP, which is expected to show an increase after the fourth quarter contraction, so that should set the tone for pounds today.

As I came in this morning, the dollar selling bias has largely remained intact but there hasn’t been much in the way of any large sweeping moves so it looks like the market doesn’t want to go one way or another until we hear from Bernanke. Silver has even seen restraint as it’s only down a few cents instead of the whole dollar incremental moves over the past several days.

To recap… Silver continued its volatile trading pattern as we saw nearly a $2.50 swing from its high and low of the day while gold held onto $1,500. Home prices continue to show weakness in housing and not much in the way of any improvement. Consumer confidence rose even though food and gas prices continue to rise while home prices continue to fall. The Fed meets today but all eyes are focused on what Bernanke says after the meeting. Interest rate differentials and commodity currencies again topped the list and Australian dollars hit yet another record.

By Mike Meyer

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1 Comment on Expect Volatility in the Silver Price to Persist

  1. I emptied most of my bank account today and bought silver and I can no longer sit back and watch my money get destroyed. I don’t care if silver is 10$ a ounce or a thousand I’m buying.

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