The Federal Reserve spooked gold and silver markets this week once again with talks about a rate hike in June if economic conditions do not deteriorate. Even though multiple economic indicators have pointed to a slowing U.S. economy, the Federal Reserve members did not see this as something of much concern or something that would persist.
Now one must ask: what if the economy really is slowing and this is the new norm? Looking into the near future, estimates for U.S. growth are not looking too bright. For instance, the Wall Street Journal polled 60 economists of which over 50% indicated that they fear GDP estimates will be revised to the downside. It seems as if the expert opinions on economic growth is unaligned with the Federal Reserve’s rosy outlook.
Why are Major Players Positioning Themselves in Gold and Silver?
We must ask ourselves: why are major players going long gold when the Federal Reserve is talking about raising interest rates? Isn’t an investment in gold and silver in a rising interest rate environment traditionally known as a bad play?
Just over the past couple weeks, it has been revealed that George Soros took a huge stake in Barrick Gold, the world’s largest gold producer. Also, J.P. Morgan Chase announced that gold has entered into a new long term bull market, and many other investment banks have changed their tune onto the shiny metal. Since some of the smartest investors are taking tremendous positions in gold, the metal seems to be an asset to keep an eye on. It is possible that these major players know something that others don’t. This leads one to believe that the recent weak economic data is not only here to stay, but the economy could be substantially slowing as we speak.
Will George Soros’ Short Bet on the Equity Market Cause Others to Follow Suit?
George Soros not only tremendously cut his equity positions, but took a $400 million dollar position that equities will fall. One must wonder whether other major players will do the same.
Where will funds start moving their money into if they get out of the stock market?
They could go into real estate, but property prices have risen so dramatically that finding good deals has become difficult.
The funds could invest in oil, but there may not be sufficient future economic growth to make this a good play.
Will the money go into bonds? This seems unlikely because interest rates are so low.
With all of this in mind, it now seems feasible that gold and silver are a good play as the alternative options are not too appealing at the moment.
Will Low Copper Prices Cause Declines in Silver Supplies?
Roughly 70% of silver is produced as a by-product of copper. With that being said, one must wonder whether low copper prices for extended periods of time will cause mines to shut down or be put on maintenance, thus affecting silver production. This could be bullish for silver over the long term as mines don’t shut down overnight.
However, if a true economic recovery takes hold, and housing becomes robust, it is feasible that copper could return to higher price levels and thus increase the actual supply of silver. Although, with future housing data expected to be lackluster, this speculation seems unlikely in the near term.
Conclusion
Gold and silver may experience some upside pressure if smart money is correct. Fundamentals seem to be improving for the precious metals and sentiment has been shifting from super bearish to slightly bullish. It will be interesting to see if this trend continues and what impact there will be on the prices of gold and silver.
*These are solely the opinions of Bullion Shark, LLC and are not intended to be used as investment advice. Please consult an investment adviser before investing.*
