Precious metals have been in a prolonged down trend over the last several years, having topped out a few years after the Financial Crisis.  Here’s why I think they are still weak and why they are still liable to go lower in the very near term:

Central Bank Assets:

Since 2009 up until quite recently, the national central banks have broadly been stocking up on assets like a credit junkie at a Black Friday Sale.

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Various central bank balance sheets, showing assets on the left side of their books.

Before the Fed’s Dec. 16 rate hike the central banks had been acting in a particular way, stocking up on assets to strengthen the underlying asset markets. The rate hike signalled a change in policy, it signalled the intent to delever the global market system.

Why this is Probably Bad News for Precious Metals:

In the event that balance sheets need to be cut loose, precious metals, as non-productive assets are likely to be a portion of the “assets” which are sold out into the market.  They’re inventory which is warehoused somewhere, costing energy and money to protect without really doing much other than acting as a hedge.  It’s also quite likely that some peripheral central banks or overlevered investors might go bankrupt, forcing the liquidation of the PM holdings. Furthermore, as the current deflationary trend continues the US Dollar should continue to strengthen, which will  put pressure on commodity producers to keep raising supplies in the market.

We are probably reaching the end point of this entire fiasco soon.  I doubt the market trend will continue past 2016 year end.  We’ll probably see this trend culminate in a market shock and some increased panic in the commodity space.  Keep an eye out.

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