Heightened political uncertainty in the U.S., continued negative economic data surprises, and concerns that the U.S. equity market may be ripe for a correction are just some of the reasons investors are worried. Bart Melek, Global Head of Commodity Strategy, TD Securities, shares his technical analysis on why the current market environment could be good for both gold and silver.
The VIX, a fear gauge for the markets, went up a whopping 60% last week, but it's not all bad news out there. My guest says now is a good time to look at gold and silver. Joining me to explain is Bart Melek from TD Securities. Thanks for being here.
Great to be here.
So before we get into your analysis on gold and silver, I want to take a step back. I mentioned the VIX, and a critical piece of that being the Fed. What do you think they're going to make of the recent volatility?
Well, certainly, the Federal Reserve looks at the VIX. They look at equity markets, inflation expectations, and they certainly look at economic data. The VIX, as far as I'm concerned, is a measure of potential problems in the equity market. And, certainly, since the financial crisis, this has been a quasi policy target for the US central bank. They've, in some ways, stimulated the equity market in order to create a wealth effect to help to move the economy forward. And if we see the VIX explode to the upside, that implies there is a lot of risk and concern and a potential for a correction. Certainly, from the central bank's perspective, that may spell trouble, potentially.
We had you in at the beginning of the year, and you shared your commodities outlook. Let's take a look at what you were forecasting back then.
And your story on gold and silver is a little bit of a different one. You say both could be at risk. You prefer silver over gold, but depending on what Donald Trump does, you may actually like gold. What do you mean by that?
Yeah. We think gold does fairly well. In our opinion, the market has been a little bit too optimistic about-- we call it Trump perfection. We think he's going to get a bumpy ride through Congress, and it may not be smooth sailing for him in passing all his initiatives.
Nice call. It looks like your average quarterly forecast for both gold and silver were spot on. So what do you think we're going to see for the rest of the year?
I think, for the rest of the year, we're going to see a range bound market, probably for gold. Nothing very much above $1,295 level, nothing [? immaterially ?] below $1,250. I think, for the average, around $1,275. Silver should probably perform in a similar way.
But I think, at this point, in the immediate future, we might migrate to the downside. What we've seen is somewhat less bellicose, you know, conversation between Mr. Trump and the North Korean leader, so some of that geopolitical tension has abated, and we've seen some pretty decent economic data. For example, today, the retail numbers from the US were fairly good. So there is a bit more risk appetite, I would say. And that will likely mean that gold and silver aren't likely, in the short run, to advance very much.
One of the things your team and you primarily look at are technical charts, meaning prices in the past and using that to predict how they might behave in the future, and you say that silver is below its technical ceiling. What do you mean by that?
Well, silver has underperformed gold in many ways. This year, gold has shot through several times through some of its technical resistance levels. Silver has not really done that in the same way. And we've argued that, to the extent that this is a fairly bullish precious metal market, silver has, potentially, some catching up to do. And silver is also twice as volatile, so in a positive precious metals market, it would perform twice as well on average as gold. So if gold goes up 2%, silver would go up more than 2%.
It really hasn't happened over the last little while, and we think there's plenty of room for it to occur, particularly since speculative interest is not all that exposed to the long side, and there's lots of room to get in.
Thank you very much.