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A strong US dollar did not hamper silver prices on the day. Silver and gold prices are benefiting from the political tensions with Iran that are driving up the price of oil. Silver and gold are once again acting as a risk asset as sustained high oil prices increase the likelihood of a recession.
By Michael Montgomery—Exclusive to Silver Investing News
The saber rattling continues between the US and Iran. Strong sanctions have been placed on Iran. This has led to Iran to threaten military action by closing the Strait of Hormuz, the choke point for one fifth of the world’s oil.
As a result, crude oil prices have risen in recent days on speculation about supply disruptions. Rising oil prices have historically been a supporting factor for precious metals.
“The focus this week is on the US and Iran… Crude oil pushed to a fresh high that has also supported some buying in the gold market,” stated Jim Wyckoff, for Kitco. Wyckoff added, “Gold and silver are going to continue to be significantly impacted by what the crude oil market does. Crude oil is the leader of the raw commodity complex; gold and silver are included in that mix.”
If oil prices were to average $120 per barrel in 2012, the added costs would consume around 9 percent of global GDP. Previous spikes in oil prices have coincided with severe recessions, a supporting factor for precious metals.
Positive US economic data
The US economic outlook has gotten a boost from robust jobs data. The ADP employment report showed that non-farm private employment rose by 325,000 jobs. The gains for December mark the largest monthly improvement since December 2010.
The better-than-expected report may show that the US economy is back on the road to recovery, albeit slowly. However, some have questioned the accuracy of the December ADP report in the past.
“Some have made the argument that ADP has had a problem in the past handling December’s data in particular, due to some seasonal adjustment problems,” stated Josh Feinman, Global Chief Economist for DB Advisors. He added, “Even if you discount the 325K jobs, and cut it down by 100,000 jobs it would still imply a strong gain.”
ADP reported that November employment rose by 176,000 jobs. The December data may show that the trend is moving towards a recovery for US employment.
Tomorrow the all-important US Labor Department employment report will be released, which will show a more complete picture of the US economy.
“Most of the labor market indicators have been looking a bit better. The decline in jobless claims the last month or two, household assessments of the labor market have been positive,” stated Feinman, adding, “putting it all together there are indications that the labor market is looking healthier, I expect tomorrow’s data to be positive.”
US dollar gains strength
As a result of the economic positive data, as well as renewed fears of a Greek default, the greenback has been making positive gains. The US dollar index rose 0.84, to 80.95.
While the stronger dollar did not hamper precious metals on the day, the strength of the dollar may punch a hole in one of the main arguments of the precious metals bulls.
“After the third quarter of last year, we are getting away from an era of high gold and silver prices, high bond prices, and a very weak dollar. And entering a new era of high volatility, perhaps many gyrations in Europe with no meltdown, but certainly a stronger dollar by all accounts,” stated Jon Nadler, for Kitco, Nadler added, “When the focus shifts there’ll be various surprises at hand. In fact the dollar during since all of the crisis’ since 2008 has risen some 13 percent, and gained percentages in global reserves.”
The strength of the US dollar going forward may be a bearish factor for silver and gold. High debt in the US is the major factor that undermines long term strength for the greenback.