Gold – Another Tough Week
Commentary for Friday, May 13, 2022 (www.golddealer.com) – Gold closed down $16.40 at $1807.40 and silver closed up $0.22 at $20.98. The bulls are still trying to gather themselves today as gold notches its fourth weekly dip and struggles to hold the important $1800.00 support. The 30-day pricing chart makes the bears smile as gold touched $1980.00 a month ago and traders were looking for a rather dovish FOMC reaction to rising inflation. The reality took time to set in – but building FOMC hawkish sentiment and Chief Powell’s warning that taming US inflation will cause “some pain” redefined “rising interest rates” by introducing the powerful half point hike. And rising yields reinvented the dollar as the world’s “go to” safe haven during times of uncertainty. There was light bargain hunting and mild short covering in the domestic market as traders bought today’s dip, but the effort looks fainthearted and I suspect the bulls are happy this is Friday, it has been a tough week. Last Friday gold closed at $1881.20 / silver at $22.33 – on the week gold lost $73.80 and silver was down $1.35.
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On Monday gold was again weak in the overnight Hong Kong and London markets, caught a decent bid in the domestic trade, yet finally sold off as New York tested daily lows. The bears are in control of this market as traders fear rising interest rates and the Dollar Index moved above 104.00 in early trading. Clearly the metals are under pressure and the DOW remains weak, losing 600 points today. Tech stocks continue to take a price beating, and Barron’s expects another down leg in stocks as bond yields march to new highs. No happiness on Wall Street today.
A steep stock market sell-off amid rising inflation should support the price of gold. But for now, traders remain focused on higher interest rates and a hawkish Fed. Which keeps the metals left footed and looking for price support. Technically the bears hold the cards as gold tests $1860.00 support for the second time in a week and silver moves to a five-month low.
It is not as though we are in the dark as to what the Fed has in mind. Analysts expect another half point hike in interest rates in June. And it’s not as though the drop in stocks was unexpected. A few right thinkers predicted early carnage in the stock market as the Fed dropped the interest rate hammer. So why is everyone wringing their hands?
It mostly works this way, at least on the short term, when the theoretical meets the practical reality. Owners of stocks were looking for the best outcome, not the worst. Owners of physical metals are in the same boat. So, both these asset classes are surprised when the harbinger of financial doom passes a bit too close for comfort. But take heart, the practical reality of both these markets will soon take hold like a secure anchor which has been tossed overbroad as the wind threatened old time mariners.
Many sellers have already sold, and the number of newly convinced sellers grows smaller each day. That is how a bottom is reached and bargain hunting begins. The cheaper stocks become the better the pickings, the same holds true for the metals. In the meantime, hold on to your hat, the winds are blowing, and may get stronger. Keep in mind two important aspects of this market in transition. First, all the Fed has to offer is a short-term fix which it hopes will tap down the US inflation problem. World inflation, complicated by the Balkan war is a different reality with its own set of problems and unstable currencies. Physical gold here in my view is indispensable. And second once the Fed reaches the coming standoff between interest rates and economic growth the dollar will move considerably lower. Reinventing the gold bullish scenario.
I would not be surprised to see gold find support between $1800.00 and $1850.00 through the FOMC rate hike next month. But suppose it does not? The Asian market thinks gold is still overpriced even at a 10% discount from highs. A 15% discount ($1700.00) is too cheap. So, we may be approaching a defendable bottom. One that can live with higher interest rates and represent value in an inflationary world. More importantly one that can wait patiently for the expected reversal in the dollar as the Fed realizes it must settle for half a loaf of bread.
On the day gold closed down $24.10 at $1857.10 and silver closed down $0.55 at $21.78.
Grant on Gold (Zaner) – (1) Gold closed down 0.7% last week. It was the third consecutive lower weekly close as yield and dollar strength continue to pose significant headwinds. (2) Silver extended lower on Monday to set a 20-week low at $21.60. (3) Platinum posted a 1.7% gain last week. While the market faded into the weekend, platinum managed a second consecutive higher weekly close. (4) Palladium remains defensive in the lower half of its COVID-era range as the market awaits a return to more normal conditions in the global automobile sector.
On Tuesday gold held up fairly well in early trading but eventually pushed below Monday’s close as rhetoric builds that the Fed has the tools necessary to deal with rising inflation and our economy will hold up as interest rates rise. This is an important central theme the bears will embrace until the dollar gives up its recent strength. High Treasury yields strengthen the Green Back – a wonderful bearish fact of life. This past month the Dollar Index has moved from 100.00 through 104.00 a barrel. This past week crude oil has dropped 10%. Tough to make a bullish case for gold during these kind of headwinds.
At the same time, this market remains nuanced. Traders are looking carefully at how these large jumps in interest rates will be handled by Wall Street. For now, stocks are wobbly and Treasury yields have dipped below 3%. I’m surprised gold did not hold up better this morning.
Today’s weakness might be a technical bear raid given paper traders sense weakness. Which could suggest we are approaching an oversold position. I don’t think professionals expect a big turnaround in this “interest rate” transition. They are looking for better footing. And perhaps a short covering rally. Which will produce a more stable pricing envelope, giving them time to adjust their thinking to the June interest rate hike.
The key to this transition will be how heavy handed the Fed will become to attain their inflation goals. Some hawks are looking at a whopping 3% interest rate by the end of this year. According to bankrate.com that would be the most active the Fed has been since 2005. Many however question whether the Fed needs such a bazooka blast to slow down the inflation numbers. This remains one of the best bullish arguments, especially for the physical gold and silver markets.
But one thing is sure. We are approaching the halfway point in this year, so you won’t have to wait long to understand what Jerome and his lieutenants have in mind. Also keep in mind that a heavily sold or bearish market quickly runs out of sellers. So again, patience is needed.
On the day gold closed down $17.20 at $1839.90 and silver closed down $0.39 at $21.39.
Jim Wycoff (Kitco) – “Technically, June gold futures prices hit a three-month low today. A two-month-old price downtrend line is in place on the daily bar chart. Bears have the firm overall near-term technical advantage. Bulls’ next upside price objective is to produce a close above solid resistance at $1,900.00. Bears’ next near-term downside price objective is pushing futures prices below solid technical support at $1,800.00. First resistance is seen at today’s high of $1,864.70 and then at $1,875.00. First support is seen at $1,835.00 and then at $1,825.00.
July silver futures prices hit an eight-month low today. A steep price downtrend is in place on the daily bar chart. The silver bears have the solid overall near-term technical advantage. Silver bulls’ next upside price objective is closing prices above solid technical resistance at $23.00 an ounce. The next downside price objective for the bears is closing prices below solid support at the December low of $20.00. First resistance is seen at today’s high of $22.085 and then at this week’s high of $22.395. Next support is seen at $21.25 and then at $21.00.”
On Wednesday gold was firmer in the overnight Hong Kong and London markets, sold off in the domestic trade, touching $1835.00 and then recovered into the $1850.00 range. The Dollar Index and crude oil were relatively steady. Traders were confused because the latest inflation numbers came in hot, but gold’s reaction was at least muted. Reuters – “U.S. consumer price growth slowed in April as gasoline prices eased off record highs, suggesting inflation has probably peaked, though it is likely to stay hot for a while and keep the Federal Reserve’s foot on the brakes to cool demand.” “The market saw the print and went ‘SELL, SELL, SELL.’ But gold has since bounced back with the thinking that the data is higher than expected, but not horrifying,” said Tai Wong, an independent metals trader in New York. “The Fed won’t get more hawkish with this report, but definitely won’t ease off either. But the sentiment (in gold) might be close to max bearish at the moment, which is why we could get a significant rebound”.
While gold remains under pressure it is worth noting that our friend is fighting for the $1850.00 level. Why? You may be seeing minor seeing short covering in a bearish market coupled with uncertainty relative to crude oil and inflation, as the Balkan war gets more complicated.
Has inflation peaked? Probably not but the so-called “sticky” argument has returned. Economicshelp.org – “Inflation is often sticky and difficult to reduce when people expect higher inflation. When people expect higher inflation, it can be more difficult to reduce it.”
The professional inflation model is so complicated it allows for too much interpretation. The public uses common sense and weekly visits to the market or gas station. I would guess that the real inflation number lies somewhere between the two extremes. But you will never sell that idea to a truck driver making a living or a housewife pressured to stretch the family food budget.
Finding even basic inflation numbers can be problematic. A coin dealer noted on the teletype today that plain white rice is a food staple that feeds half of the world’s population. Prices have risen 63% in less than a year. I checked it out – the information is correct, but I had no idea.
My take on whether we are ahead or behind the inflation curve is not academic. Anyone could argue that putting a number on inflation encourages carelessness because the accepted government tools exclude the very things consumers buy on a regular basis. They are then sold the idea that we are actually better off because of efficiency gains made in consumerism.
I’m not raining on the good economists making a living, but it all gets too vague. I have come to see inflation rather as a malicious threat which has robbed the American middle class for generations. Now couple this with the growing post-World War 2 notion that big government can solve all our problems. And it should be easy to see we are heading down the wrong road.
On the day gold closed up $12.70 at $1852.60 and silver closed up $0.16 at $21.55.
Zaner (Chicago) – “Obviously, gold reached a moderately oversold condition into the overnight low, with prices forging a low to high bounce of more than $20.00. Perhaps some shorts decided to take profits rather than risk the volatility of the upcoming US CPI report. However, Chinese inflation readings overnight were hotter than expected, indicating the capacity for expanding inflation in an economy perceived to be slowing. Unfortunately for the bull camp, gold ETF sales continued yesterday with a large 266,007-ounce liquidation. Yesterday’s decline in gold ETF holdings was the 4th straight day and the largest one-day outflow since March 18th. While not a tight correlation, gold prices have followed bitcoin prices lower recently, but now bitcoin appears to have found a measure of value above the $30,000 level. Similarly, the dollar index has faltered on its charts as if the 104.00 level is an overvalued level and a trade in the dollar index down to 103.23 today could shift the currency impact on gold from negative to positive. Certainly, the uptick in Chinese inflation suggests today’s US CPI could post a reading above trade expectations, especially with projections of a 0.2% gain in CPI a “low bar”. However, it is not a given that higher than expected CPI will lift gold from a flight to quality perspective, as a hot CPI will likely push up interest rates again and lift the dollar and in turn equities are likely to come under noted pressure. Therefore, a hotter than expected US CPI could result in a rekindling of overly aggressive US interest rate hikes which in turn likely results in risk off selling of equities and commodities. Seeing equities and commodities dive from hotter than expected inflation could exacerbate a recent tide of commodity selling from long-term holders like indexers, CTAs, and hedge funds. Even though gold and silver failed to fully embrace inflationary signals over the last 2 1/2 months with commensurate upside action, we suspect prices have retained some minimal inflation premium and that premium will likely be extracted with a sweep of “as expected” or “weaker than expected” US CPI data. From a technical perspective, June gold’s failure at the psychological pivot price of $1,850 yesterday provides the next downside target of $1,825, and perhaps even $1,800 if today’s CPI causes initial declines in gold and silver prices. While the silver market also rejected initial selling overnight the market lacks a credible bullish fundamental case, with the biggest hope of the bull camp flowing from the extreme oversold technical condition.”
On Thursday gold opened steady but dipped by midday as the Dollar Index threatened 105.00 which approaches an amazing 20-year high. Reuters – “Gold and other precious metals dropped on Thursday, with palladium shedding more than 8%, as investors flocked to the dollar driven by bets the U.S. Federal Reserve will stick to aggressive rate hikes. “Dollar is rallying as things potentially look negative in the U.S., which is hurting gold. Also, the market is realising the likelihood of seeing pretty aggressive interest rate increases,” said Bart Melek, head of commodity strategies at TD Securities. Rival safe-haven dollar climbed to fresh 20-year highs – making gold less appealing for other currency holders driven by concerns tighter monetary policies to tame surging inflation will hurt the global economy. Although it is considered a hedge against inflation and a safe bet during economic and political turmoil, gold is highly sensitive to rising U.S. interest rates, which increase the opportunity cost of holding non-yielding bullion. “However, gold is holding relatively better when compared to the industrial precious metals,” the demand for which could be hurt in a recession environment. Declines in gold were capped by a slide in the benchmark 10-year Treasury yields, which hit the lowest level in two weeks.”
Today’s producer price index rose to 11% again confirming investor fears that the Fed will continue with half point rate increases. The CME FedWatch Tool is pricing in a 93% chance of an additional 50-point interest rate hike in June and a 90% chance of another 50-point hike in July. That is real firepower so expect stocks and the metals to remain left footed until the Fed either takes a breath or there is some slowing in the rate of inflation. I don’t think any of this is a big surprise but confirmation that the Fed is serious about taking away the punch bowl always creates a bit of panic in a market which for years grew accustomed to government largess. And the psychology of this market continues to favor the bears. Powell said today that it would have been better if the Fed had raised the benchmark rate “a little sooner”.
Still, I’m looking for a relief rally perhaps by early next week as the bears take profits and move to the sideline to count the money they made in this surprisingly fierce “short panic”. We sold the house down today, so the physical market is alive and well. As usual live product for immediate delivery remains a challenge. Waiting time for new product from world mints is growing longer and, in some cases, premiums are moving higher.
Which should leave you scratching your head in a world turned upside down with supply restrictions, renewed Russian tariffs, physical liquidation to cover stock market losses, big losses in the crypto currencies, and the renewed interest in the dollar as a safe haven. The last point is important. When investors hit the “panic button” the dollar become unbeatable as a place to park funds and weather the storm. Still, the smart money considers a real global recession unlikely, which should help support gold prices in the short to medium term.
Barrons – The CPI’s year-over-year gain was 8.3% for April, below the March result, but higher than expected. Markets are having to grapple with the fact that inflation is not declining very quickly, which could force the Federal Reserve to lift short-term interest rates faster than currently expected. The ultimate result? A recession. Now, “another risk off day is here,” wrote NatAlliance Securities’ Andrew Brenner. The losses come following inflation-induced declines on Wednesday, which caused all three indexes to sell off, with the Nasdaq down more than 3%. Overall, the stock market has made one thing clear in the last few trading days: it isn’t finished reflecting the economic risks. Now below 4,000, the S&P 500 has fallen beneath key levels at which it had previously found buyers to bring it higher. That opens the door for the index to potentially fall to below 3,700 soon, wrote Frank Cappelleri, chief market technician at Instinet.”
On the day gold closed down $28.80 at $$1823.80 and silver closed down $0.79 at $20.76.
On Friday gold hit a 13-week low but US stocks rallied, shaking off some losses from earlier this week after concerns over persistent inflation and the resilience of the US economy stirred up further volatility in recent sessions (Emily McCormick / Yahoo! Finance).
There was light short covering going into the weekend and the bulls are hoping the bears are getting tired in a perhaps oversold market. But what the bulls really need here is fresh news to recharge that longer term inflation scenario. And time to gather themselves in what has turned out to be an unrelenting price downtrend for the past 4 weeks.
Still the longer-term scenario for gold and silver bullion should encourage because while prices remain weak, they are still a primary, value driven choice in a world of uncertainty. Especially as world currencies and crypto trading are fundamentally shaken. I’m also encouraged that world stocks and Wall Street are settling down. This suggests that even though US consumer confidence is looking at 11-year low, positive aspects of recovery are helping clear some of these rain clouds which will eventually refocus the bullish inflation scenario.
Finally, buying in the physical market remains solid in this downtrend. And while availability is improving manufacturers remain behind the production curve. For now, 2022 US Gold Eagles and Buffaloes are a week or two out – a big improvement. 2022 Krugerrands and Philharmonics are hit or miss but available. The 2022 Canadian Gold Maple Leaf is delayed. Any year, new fractional gold remains delayed even though premiums are high.
Boxes of the 2022 Canadian Silver Maple Leaf are delayed. Boxes of 2022 US Silver Eagles are 30 to 60 days out. Boxes of new Silver Philharmonics and Krugerrands are two weeks out. Private manufacturers of silver 1 oz rounds, 10 oz and 100 oz silver bars are 2 weeks out.
I’m growing more worried about the US commitment in the Ukraine. The Associated Press noted that the House approved a fresh $40 billion Ukraine aid package beefing up President’s Biden initial request. The new legislation would bring American support for the effort to nearly $54 billion, including the $13.6 billion in support Congress enacted in March. That’s about $6 billion more than the U.S. spent on all its foreign and military aid in 2019, according to a January report by the nonpartisan Congressional Research Service, which studies issues for lawmakers. It’s also around 1% of the entire federal budget.
On the day gold closed down $16.40 at $1807.40 and silver closed up $0.22 at $20.98.
Platinum closed down $0.50 at $936.40 and palladium closed up $57.10 at $1918.10.
My Brothers and Sisters, thank you for your business, friendship, and patience. If you have unusual circumstances, need cash or a special visit – talk to Harry. All our in-house staff have been vaccinated and many now have the booster! We continue to enforce ridged safety standards between people and product. Be careful, the contagious Omicron variant remains dangerous and accounts for most world infections. At the same time trust that God will get us back to normal and our traditional business model. Richard Schwary
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