With the U.S. dollar tumbling 1.3 percent while the euro surged, here is a look at the impact of the Italian no vote, and is the correction in gold and silver finally over?
By Bill Fleckenstein President Of Fleckenstein Capital
December 5 (King World News) – Well, the pollsters finally got one right, as the Italians voted no. What that means in the short run, according to the Lord of the Dark Matter, is literally nothing. (Obviously it implies unhappiness with the status quo, but I don’t think we needed this election to learn that.) He also pointed out that from the standpoint of voters showing their displeasure, there are no new data points for the euro until next spring…
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As for various market reactions, there were some flurries of activity, but after a few hours of trading, for the most part, it was a nonevent (more on that below). Most bond markets were weaker, but not anything out of the ordinary, and European equity markets were actually about 1% higher, with the exception of Italy.
Our stock market naturally joined the party, led by the Nasdaq, which gained about 1% in the first couple of hours while the Dow and S&P lagged behind, gaining only about 0.5%. In the afternoon the indices basically went sideways.
An Outside Perspective
There was plenty of action away from stocks, and I think it is clear that a no vote had been discounted by the euro. I say that because, after having traded as low as $1.05, it reversed course and actually gained ground on the session to close around $1.07. I don’t want to make too much out of that, but given that the dollar has become so important to everyone’s thought process, if the euro can actually rally for a while, that would put pressure at least on the dollar index, since the euro is such a heavily weighted component.
From a technical standpoint, the euro has a chance to have an outside week, and potentially even an outside month, and if it begins to look like that is taking place it could be a pretty big deal, at least in the medium term. Going into the vote this weekend it was difficult to see how sentiment could change about the euro, but it may have gotten pushed so far that it may be able to bounce for a while. And of course if it bounces that market action will rewrite the news. I don’t want to get too far ahead of myself, but I did want to note the potential for an unscripted and “impossible” move higher by the euro. (I am not doing anything about this, I’m just noting that the possibility exists at this juncture.)
Turning to fixed income, it was just flat, ditto oil, while the metals saw a good deal of motion. Gold lost 1.5% in early New York trading before closing 0.7% lower. Silver on the other hand was not as weak, even during the worst of the gold selloff, and finished the day flat.
It was interesting to note that even when gold was 1.5% lower, the miners acted much stronger than they usually do, while silver was resistant to the decline, as was platinum, and copper was up 3%. Said differently, gold declined without its usual compatriots along for the ride and there could be useful information in that. Having said that, for the last few weeks every time it looks like there is something positive to say about gold it manages to disappoint, but one of these days, once it stops disappointing, it might just turn around and explode.
King World News
I was interviewed by Eric King last Friday, during which we discussed the election, as well as the bond and gold markets. I encourage readers to have a listen.
Included below are three questions and answers from the Q&A’s with Bill Fleckenstein.
Bonus Q&A
Question: Cover of The Economist. “The Mighty Dollar” — Why a strengthening dollar is bad for the world economy Just as the Euro and Pound are showing some signs of life.
Answer from Fleck: “The cover is likely going to signal a big inflection point, but the euro and pound are pretty lame. It is going to take some massive change in psychology to really crack the dollar in the short run, though it too is hugely flawed.”
Question: If interest rates go up so do bond rates.This would create competition for gold and strong headwinds for higher gold prices.Do I have this right?
Answer from Fleck: “That is what people say, but history doesn’t bear that out. Gold very often (usually) rallies even as central bankers raise rates.”
Is The Correction In Gold & Silver Finally Over?
Question: Hi Bill. Do you think the brutal 3 month correction is over in the metals? The miners look like there consolidating and about to move higher. Thanks.
Answer from Fleck: “It’s only been post-election that has been unusually brutal, IMO. But yes, I think so, however gold needs to get going to make the case more convincing. At this juncture, I’d still use mental stops if I was adding ideas for trades. I’d really feel better if gold was back to >$1,200 or $1,220-ish, then you could act with more abandon. Hope that helps.”
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