Summary •Fed Chair Janet Yellen's characterization of rising inflation as "noise" may come back to haunt her. •The inflation report and the Fed meeting were key factors behind gold's biggest daily gain since last September and a surge in the silver price. •Developments in Iraq and the winding down of commodity financing deals in China also drove precious metals higher.
Precious metals surged after a series of bullish developments that, on Thursday, sent the gold price to its biggest daily gain in nine months and resulted in an even bigger move up for silver. Higher than expected inflation reported on Tuesday combined with unexpectedly dovish comments by Federal Reserve Chair Janet Yellen on Wednesday spurred the jump in metal prices the following day.
Safe haven demand stemming from developments in Iraq and the threat of even higher oil prices were also factors, as was the unwinding of many commodity financing deals in China that prompted a surge of precious metals buying in the futures markets. The Thursday surge triggered stop-loss orders by those short gold and silver and this exacerbated the move, something that is usually only seen when prices are falling.
For the week, spot gold jumped 3.0 percent, from $1,275.90 an ounce to $1,314.70, and silver surged 6.2 percent, from $19.67 an ounce to $20.88. Gold is now up 9.1 percent for the year, still 32 percent below its record high of over $1,920 an ounce almost three years ago, and silver has staged a dramatic turn-around (it was in negative territory for the year as recently as two weeks ago), now 7.4 percent higher in 2014 but still 58 percent below its all-time high near $50 an ounce reached in early 2011.
Gold fell slightly on Friday as short-term traders took profits and both equity markets and the U.S. dollar rebounded (precious metals often move opposite of these two), however, gold and silver still ended with their best week since mid-February. This sets the stage for the completion of a head-and-shoulders bottom as noted here a week ago and as detailed in this item by veteran trader Peter Brandt. A move back to $1,400 is said to be needed to complete the right shoulder and last week's rally was a big step toward that goal.
It was stunning to watch the gold price rocket past prior resistance at around $1,280 an ounce and then take out the psychologically important level of $1,300. A Mining.com report indicated that, by mid-afternoon on Thursday, futures trading volume was double the recent daily average as three "big chunks" of futures orders were placed in just 15 minutes. This serves as a much needed reminder that precious metals can make big moves up, as well as down, the former coming when bullish traders with big bets catch bearish traders off guard and trigger stop loss orders as prices rise.
Tuesday's inflation report showing a spring surge in consumer prices and Fed Chair Janet Yellen's characterization of this development as just "noise" were key factors behind many traders switching from gold bears to gold bulls for reasons that are made clear in the chart below.
Annualized six-month price increases are now at their highest level since late-2011, back when inflation and the gold price had both been rising steadily for more than a year. With the prospect of even higher inflation in the period ahead due to rising oil prices, Yellen may have blundered for the second time in as many press conferences with her "noise" comment.
Recall that the new Fed Chief moved markets in the opposite direction earlier this year when she suggested interest rates may begin to rise as soon as six months following the end of the Fed's "tapering" of their bond buying this fall.
If anything, markets expected a hawkish Fed view last week, but the combination of lower growth forecasts and little concern over rising inflation or asset bubbles caught traders off-guard.
To be sure, developments in Iraq will be a key factor in whether the gold rally continues.
Oil prices reached a nine-month high last week and traders have bid prices up for the entire natural resource sector with commodity indexes now at or near double-digit gains for the year.
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