Precious Metals Plummet As Gold, Silver Drop (GLD, SLV)

Precious metals dropped precipitously overnight as gold and silver futures both plunged to new lows as significant technical levels gave way in gold. Also, declining inflation expectations have weighed on the metal and gold has now had its worst quarter in decades with just a few trading days left.

Declining Inflation Expectations

A large catalyst of the move lower in gold is a decline in inflation expectations. The International Monetary Fund and the consensus estimate of Wall Street economists both see U.S. CPI Inflation of 1.5 percent for 2013, well below the Fed's forecast of 2.0 percent.

Market expectations of inflation are declining as well, as measured by break even bond yields. The 10-year break even rate of inflation, a measure of the market's perception of annual inflation over the next ten years, has fallen to an eighteen month low of 1.97 percent, as the chart below shows. Thus, the market does not anticipate the average rate of inflation over the next ten years exceeding the Fed's target.

Futures Lower

Gold futures declined 3.66 percent in early Chicago trading as inflation expectations have taken a sharp leg lower of late. Gold futures for August delivery fell $46.70 to $1,228.40 per ounce, a new 2013 and 21-month low.

Silver futures fell even more sharply as the metal is not only a store of value against inflation, but is also economically sensitive. Due to its use in computers and automobiles, silver prices are more sensitive to growth shocks such as the current fears emanating out of China as the financial sector appears to be having liquidity troubles. Silver futures for September delivery fell 5.02 percent to $18.57 per ounce.

Strong Dollar

The dollar has also been strong of late as the Dollar Index rose back to the highs of early June. Also, the Dollar Index rose back above the key 50-day moving average, which could have caused some algorithmic selling of gold, creating a wave of selling as gold futures broke the key technical support at $1,270.00 per ounce.

The Dollar Index rose to a session-high of 82.83, up 0.32 percent on the day but still off of the May 22 high of 84.35. The dollar gained against most major currencies with the EUR/USD declining 0.41 percent to 1.3023 and the GBP/USD falling 0.43 percent to 1.5355. The dollar also erased most of its earlier losses against the yen heading into the U.S. open.

What Next?

Without a catalyst for the move lower such as a Fed decision, the move seems overdone. Besides, gold has overshot inflation expectations on the chart and looks primed for a bounce. Besides, the Relative Strength Index (RSI) is down at 22.3, well below the 30 threshold for being in oversold territory. Generally, assets bounce from these oversold territories, even if it is just a short-covering rally before more downside follows.