In the last two weeks, gold and silver have gotten crushed.  Gold is down about $60, or almost 5% since the beginning of January.  Silver is down about $2.50 or about 8% to about $28.50 during that same time frame.

Usually precious metals move with interest rates (metals down as rates go up) or with the US Dollar (metals up as dollar down).  But yields on the government 10-year note are actually down over the past two weeks, from about 3.37% to 3.27%, and yields on the 5-year note down more than that.  Yields on the 30-year bond are up very slightly, from about 4.43% to 4.47%.

The Euro currency had a volatile two weeks, falling from about $1.337 to $1.29 on worries about bond auctions by Portugal, Italy, and Spain.  However, those auctions went along relatively smoothly and the Euro regained everything it’s lost this month and is now right back at about $1.337.  The British Pound is up against the USD over the past two weeks, i.e. the dollar is down, as is the Japanese Yen, though very slightly.  The Swiss Franc is down slightly against the USD, from about $1.07 to $1.04 over the past two weeks, though it’s hard to see that currency as substantially driving metals prices.

It should also be noted that the huge sell-off is not seen in other commodities: Copper is only down 7 cents, or 1.5%, to about $4.40 during January.  Oil is only down about $1, or less than 1.5%, after having been down substantially more a week ago; it has rebounded while gold and silver have sold off, which is quite unusual in recent months.

In other words, the usual factors that would drive metals prices lower are conspicuously absent, but they are dropping while other commodities are essentially stable in price, so something else must be going on here.

I see two issues:  First, China again raised it’s bank reserve requirements, reducing demand for gold by those banks and reducing the leverage available to Chinese buyers of gold.  Second, and probably more important, is the issue mentioned above regarding the acceptable results of the three PIIGS government bond auctions.

As the market sees stability set in in Europe (even though I remain somewhat skeptical of the durability of that stability), the demand for a “safe haven” like gold and silver is getting crushed.

Similarly, as the US stock markets remain strong and implied volatility in options shows a diminishing level of investor fear, traders and investors are abandoning the safe haven (which, as it often does, turns out not to be so safe, so I wonder why people keep jumping into that frothy pond) and returning to more traditional investing in stocks.