Friday, March 14, 2014

Rock, Taper, Scissors - Shoot

Led by their respective miners, precious metals continue to block and tackle higher out of the broad base they established last year. Should the anxieties delineated by the pattern continue, a brief retracement window for the sector will be opening with the March Fed decision next week. 

Having said that, we do not believe at this time the reward in market-timing potential retracements warrants the risk of missing the next leg higher. Primarily, because the space has benefited from several different motivational catalysts, which often is the case with early but dominant trends. 

While Crimea and China provide fodder for the business headlines as to why precious metals have received a strong bid of late, we take our cues largely from 10-year Treasury yields and the currency markets which have provided variable but overlapping tailwinds for the sector. 

Although Draghi succeeded yesterday with jawboning the euro lower, its effects to the markets will likely be fleeting without material action by the ECB in the near-term. The same is true for the yen, with respect to further action required by the BOJ to arrest the retracement rally that has sapped broader risk appetites this week. 

As we have followed and shown with our value-trap comparative with the banks (circa 2009 & 2011), the miners worked off the last layers of the ill-timed inflation premium worn last year with a successful retest of the financial crisis lows. From a confluence of different long-running perspectives, the outlook for the precious metals sector still looks strong. 

*Click to enlarge images