Sprott Global Resource Investments

Sprott's Thoughts

Sprott Gold Team

Gold Insights

There was a lot of central bank bearish activity Tuesday morning: two Fed governors were speaking hawkish on rates yesterday and today, there was a rumor of potential BoJ activity to weaken the Yen, and the ECB is now discussing tapering of their QE program. To make things worse we saw a very thin market without a lot of bids, most selling is into a vacuum hence the sharp volatility.

Gold bullion broke the $1300 level around 8:15, again a very illiquid time in the market. The trigger was likely the Yen weakening on BoJ rumors. The Fed’s Lacker gave a speech urging higher rates to head off inflation around 9:00 am leading to more selling. Selling further accelerated around 11:30 when the ECB started discussing tapering of their QE program. By then we were into heavy selling as USDJPY backed up to 102.8 and yields started reversing globally. Yields however remain well below key resistance levels with daily and weekly trends still heading down. JPY probably does not break until the 106 level. The 5 year TIPs yield remains below key resistance still.

Sentiment has clearly changed very quickly. However, our primary models still show gold bullion and gold equities should be trading at much higher levels and unless there has been a radical change in the correlation patterns observed over the past decades we believe this will lead to a buying opportunity shortly. The technical support for bullion is now at $1250/60. October is also a seasonal low period for gold with mid-October usually marking the intra-month low. All our equity indicators were oversold prior to today and now even more so.

We believe this is a correction within a secular bull market. So far we do not see any the developments as the catalyst for a bear market. The real issue is the lack of liquidity due to holidays (Rosh Hashanah, Passover, and China’s Golden Week) and skittishness of where central bank policies are going. We do not see the end of negative interest rates and we do not see monetary policy giving way to fiscal policy (if it happens) to be gold bearish either.

If you have any questions about this article, please contact your Sprott financial advisor at 800-477-7853.

 

This information is for information purposes only and is not intended to be an offer or solicitation for the sale of any financial product or service or a recommendation or determination by Sprott Global Resource Investments Ltd. that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on the objectives of the investor, financial situation, investment horizon, and their particular needs. This information is not intended to provide financial, tax, legal, accounting or other professional advice since such advice always requires consideration of individual circumstances. The products discussed herein are not insured by the FDIC or any other governmental agency, are subject to risks, including a possible loss of the principal amount invested.

Generally, natural resources investments are more volatile on a daily basis and have higher headline risk than other sectors as they tend to be more sensitive to economic data, political and regulatory events as well as underlying commodity prices. Natural resource investments are influenced by the price of underlying commodities like oil, gas, metals, coal, etc.; several of which trade on various exchanges and have price fluctuations based on short-term dynamics partly driven by demand/supply and nowadays also by investment flows. Natural resource investments tend to react more sensitively to global events and economic data than other sectors, whether it is a natural disaster like an earthquake, political upheaval in the Middle East or release of employment data in the U.S. Low priced securities can be very risky and may result in the loss of part or all of your investment.  Because of significant volatility,  large dealer spreads and very limited market liquidity, typically you will  not be able to sell a low priced security immediately back to the dealer at the same price it sold the stock to you. In some cases, the stock may fall quickly in value. Investing in foreign markets may entail greater risks than those normally  associated with  domestic markets, such as political,  currency, economic and market risks. You should carefully consider whether trading in low priced and international securities is suitable for you in light of your circumstances and financial resources. Past performance is no guarantee of future returns. Sprott Global, entities that it controls, family, friends, employees, associates, and others may hold positions in the securities it recommends to clients, and may sell the same at any time.

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