As I am writing this blog, the market is still open with gold sharply down by about nine dollars and silver down by 15 cents. I don't think much recovery will happen in the remainder of the trading hours today.
But this is not the key development. Main news is that oil is down $2.30 ,nearly 5% and that is huge. Crude being down despite the news about Qatar makes sense only and only if there was a margin call on crude traders. In today's market, to be ahead of the game one has to watch few parameters:
- Dollar index
- Bond yield and
- Crude prices
While dollar index and Bond yield are widely understood, crude correlation is not. So let me explain. There are huge debt payments that are becoming due from various shale oil producers. Those shale oil producers can't even break even at oil prices below $50. All the loans were structured hoping that the oil prices will be around $70/barrel or higher. This is forcing banks to write off some of debts and bankruptcies on account of shale oil producers.
I suspect today, with this sharp drop, there must have a margin call on oil traders and they were forced to liquidate some of their hedge positions in precious metals.
Low oil prices also brought down the entire energy sector. But point to ponder is why the prices are down. It is simply - economy is not getting stronger. In fact it is deteriorating. The gold to silver ratio is declining from an all time high and this happens only when the economy has gone into a recession.
So the point that I am trying to make is that, we don't need to wait for official numbers/pundits to say this. WE KNOW, we have entered recession.
With today's action, and the commentary that I provided above, I am no longer bullish on gold and silver on the short term. It will take some time for dust to settle down. Precious metals do go down when entering the recession but then they take off when money rotation from out of stock to safe havens occurs.
