Fear Rising, And Why Gold & Silver Will Obviously Benefit From This
The price of gold bounced strongly on Friday amid a sell-off in markets that was primarily driven by fear about the failure of Silicon Valley Bank. Is gold acting as a safe haven at this time? Similarly, is silver? If so, is this a temporary bounce? We believe the bond market has the answer to this question. We also believe it is so much more than a short-lived bounce. Here is why.
While the SVB failure is a real piece of drama, beating events that occurred 2008 Global Financial Crisis, it is not the fundamental driver for gold. There is a much more important evolution going on currently, and it is the bond market.
The chart below is the TLT ETF, a proxy for 20-year Treasuries. Gold is strongly correlated with Treasuries. It is also inversely correlated with the US dollar.
What we see unfolding in markets right now is resistance in the US dollar. Since Thursday, we have also observed a rise in Treasuries. Both of these indicators suggest that the market believes that Fed must stop its aggressive hiking campaign. Whether the Fed will listen or not is another question, and we will know for certain by March 23, the next FOMC meeting.
The market now believes that aggressive rate hikes should stop. That’s why rates dropped and Treasuries rose sharply on Friday. It's important to know that SVB fell victim of the crash in Treasuries.
The TLT chart confirms a bottoming formation in Treasuries. This is not a regular bottoming formation, but a really strong one.
As seen on the chart, the 3rd falling trendline is being tested. A cup-and-handle type of formation is in the making within those 3 falling trendlines. If and when this 3rd trendline is cleared, we will know for sure that bonds want to move higher. That’s the ultimate confirmation that gold will move higher in tandem with Treasuries.
Once gold has cleared $2000/oz, it will start a journey based on intrinsic drivers. For now, it still needs an external driver, which can be found with the combination of the US dollar and Treasuries.
We are bullish on gold. Consequently, we are exceptionally bullish on silver.
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