Gold and Silver Prices Hit by Rising Greenback

Although in recent weeks the silver price has suffered from high volatility, the white metal has outperformed gold. Though silver is currently correcting – in-part because of a rising US dollar – the bull market in the metal remains intact. Industrial silver demand continues to grow – especially demand from end users in the solar and electronics industries. Furthermore, in recent years the medical sector's silver demand has reached new record highs.

In recent trading sessions both gold and silver have come under selling pressure as the US dollar continues to appreciate against other major currencies. Yesterday the US Dollar Index (USDX) hit a new high for this move at 80.40. The euro continues to struggle against the greenback, which is no surprise considering the economic problems in Europe. US economic data continues to surprise analysts to the upside, which is also encouraging traders to go long equities rather than gold. But in stark contrast to this, the southern countries of the eurozone – especially Greece, Spain and Portugal – are hit by economic depression and soaring unemployment figures. The UK is also on the verge of falling back into recession, with some agitating for the Bank of England to engage in even more quantitative easing.

The BoE's bond purchasing programme has indeed propped up the banking sector and parts of the wider economy, but has been unsuccessful thus far at generating the kind of upturn currently being experienced in America. Since Q4 of 2011 the European Central Bank has also been flooding the markets with massive amount of new money, by offering European banks three-year loans at very low interest rates (around 1%). Nevertheless, tensions at the EU credit markets remain high. As US investment funds have shied away from European equities and bonds owing to fears of sovereign and bank defaults, demand for US dollars has been growing among European banks. In addition, developments in the opaque derivatives markets could also trigger growing demand for dollars, given that banks are having to make payouts on Greek debt.

CDS is traded over-the-counter (OTC) as opposed to on exchanges, so it is hard to calculate the dollars which are necessary to cover these CDS payments. If the dollar continues its rally, precious metals will probably continue to consolidate. Yesterday the gold price dropped decisively below $1,700 per troy ounce, and has fallen further in trading today. Notably, for the first time since last autumn, platinum is more expensive than gold.