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Gold – Adjusting to Higher Interest Rates

Gold – Adjusting to Higher Interest Rates

Commentary for Friday, Aug 19, 2022 ( – Today gold closed down $7.70 at $1747.60 and silver closed down $0.39 at $19.06. Gold continues to adjust to the coming higher interest rate scenario. So, until the FOMC plan to tackle inflation changes we would expect these markets to remain defensive. Meaning that higher prices from possible increased safe haven demand will be capped by higher interest rates. Last Friday gold closed at $1798.60 / silver at $20.68 – on the week gold was down $51.00 and silver was down $1.62.

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On Monday gold sold off on the open as traders remained defensive. A stronger dollar and China lowering interest rates has added tension to an already nervous trade. While the bears still hold the cards there is a promising short-term rising uptrend which began in late July.

And made highs above $1800.00 by mid-August. Good news for the flagging bullish sentiment but this happy spot also presents the paper traders with their usual option – buy the dips and sell the rallies. A particularly nice option today considering gold’s strong overhead resistance between $1800.00 and $1850.00 in place since May.

I would not be concerned about today’s drop. Nothing much has changed, and this looks like the typical fire drill. Still the Fed’s next move is dangerous to the bullish scenario – but uncertain.

Is inflation rising or falling? They have messed with typical inflation standards so badly that even those informed folks cannot seem to agree. Crude oil continues to tank, a negative for the inflation scenario. But the reasoning behind these lower prices is also confusing. Are oil prices moving lower because economic conditions in China seem to be deteriorating? Or is the world getting ready for recession. Or stagflation (high unemployment, inflation, and recession).

There is more economic and geopolitical noise today than there was at the beginning of the pandemic. And the Russian madness continues to rearrange the economic deck chairs.

Ignore the headlines and wait for our Uncle Sam to take the next step in his interest rate plan to save the US from recession or worse. The Fed could move at any time, but I think they will keep their powder dry until the next official “important” meeting (Summary of Economic Projections) – September 20th and 21st. They will use the time remaining to get a better feel of “appropriate action”. Do not make fun of such terms, this is serious monetary business. I wish them luck.

If they decide a heavy hand is necessary against inflation gold will move lower. But I suspect a moderate approach which will support current gold and silver pricing. The longer they take to implement higher interest rates, the more likely we will see higher gold and silver prices. In the meantime, we are seeing typical summer action for the metals. Steady but not too exciting.

On the day gold closed down $17.20 at $1782.40 and silver closed down $0.43 at $20.25.

Zaner (Chicago) – Gold set back overnight after a brief fling with the upside on Friday. While Friday’s move higher in the face of a stronger dollar was impressive, it could not maintain in the face of another move higher in the dollar overnight. The disappointing economic data out of China and China’s central bank cut unexpectedly cutting its key interest rate shows a weaker than expected economy, which lowers demand expectations for gold. Chinese industrial production rose 3.8% from year ago in July, well short of the 4.5% expected. The July Fed meeting minutes release this could provide a hint to whether the Fed will increase 50 or 75 basis points in September. After last week’s inflation data suggesting it had peaked, there was some talk the hike would only be 50 bp. Richmond Fed president Barkin said Friday that the central bank needs to keep increasing rates until the inflation rate falls back to 2%. Gold ETF holdings fell 85,891 ounces (-0.1%) to 100.740 million in the most recent session, while silver holdings increased by 127,956 to 798.52 million, a gain of less than 0.1%. Friday’s Commitments of Traders report showed managed money traders were net buyers of 24,898 contracts of gold for the week ending August 9, increasing their net long to 52,797. Non-commercial and non-reportable traders were net buyers of 20,612, increasing their net long to 160,677. In silver, managed money traders were net buyers of 2,167, reducing their net short to 6,229. Non-commercial & non-reportable traders were net buyers of 4,853, increasing their net long to 14,262. All these positions could be defined as “flat” relative to their historic levels.”

On Tuesday gold New York spot remained choppy between $1772.00 and $1780.00 so no surprises here as the Dollar Index is also choppy trading between 106.5 and 107.00. The metals remain a sleepy trade with tension right under the surface waiting for the next headline.

To be better suited to this market you may need a bit of stoic philosophy. And it might help you sleep better at night. Running the Fed’s “might do” list on a regular basis is not the best use of your time. The fact that they favor higher interest rates to fight inflation has been gold’s sword of Damocles since the Fed decided to take the monetary punch bowl away from Wall Street.

Yes, higher interest rates have capped the price of gold, but to what extent? We are still holding up nicely between $1700.00 and $1800.00. Pricing is surprisingly firm if you think about the tons of rhetoric that has been released from Uncle Sam. This past month the DOW seems happy enough moving from 31000 through 34000. So, the threat of higher interest rates, while a drag on some Wall Street sectors may become less of a concern. I’m not a big stock man but it would seem that lately they are not staying up nights worrying about interest rates.

I have mentioned this before, but I am a big fan of the Efficient Market Hypothesis (EMH). It states that in any given trade all information known is already price reflected. As this applies to gold, today’s price already reflects all known information. My usual comments about investors ignoring all the “noise” continues to make sense. Enjoy a relatively quiet summer until the Fed does something meaningful. You will have plenty of time to pivot.

Christopher Lewis (FX Empire) – Gold Market Technical Analysis “Gold markets rallied a bit during the trading session on Tuesday but gave back gains near the $1820 level. The market forming this candlestick does show just how much there is in the way of negativity in this market. Pay close attention to the US dollar, because it shows a significant negative correlation to this market. If we break down below the bottom of the candlestick, the market is likely to drop down to the $1775 level. If we break down below that level, then the $1750 level will more likely than not end up being a nice target.

On the upside, if we were to break above the 200-Day EMA, then it’s likely that we could go to the $1875 level. Ultimately, this is a market that I think will continue to be noisy and move not only based on the US dollar, but the interest rate markets as well. Ultimately, this is a market that I think will continue to see a lot of noisy behavior in it, but as we are near an area where we had a lot of “market memory” in this scenario at this level, it does make a certain amount of sense that we have a bit of a pullback. Whether or not gold sells off drastically is a completely different question, but a pullback makes so much sense.”

On the day gold closed down $8.20 at $1773.20 and silver closed down $0.18 at $20.07.

On Wednesday gold drifted lower as the Dollar Index continued firm, treading between 106.00 and 107.00 since Monday. Reuters – “Gold is slightly down due to stronger dollar and yields. The high UK inflation number has raised concerns that central banks around the world will be more aggressive,” said David Meger, director of metals trading at High Ridge Futures. UK inflation jumped in July to the highest since February 1982, surpassing economists’ forecasts in a Reuters poll and fueling investor bets that the BoE would keep on hiking interest rates quickly. “The main focal point of the day is Fed minutes. There are expectations that Fed would be reinforcing a hawkish stance, which could lead to additional pressure on gold.”

Grant on Gold (Zaner) – “(1) Gold ended last week up 1.5%, setting a 5-week high of $1807.96. It was the fourth consecutive higher weekly close. (2) Silver posted a 4.6% gain last week. The white metal eked out a 6-week high at $20.87 on Monday before succumbing to selling pressure. (3) Platinum ended last week with a gain of 3.4%, setting an 8-week high of $973.52. It was the fourth consecutive higher weekly close. (4) Palladium remains in the lower half of the COVID-era range as recent gains faltered ahead of the 100-day SMA.”

Jonathan Da Silva (Kitco) “The triangle pattern in gold we had suggested favored a break to the topside has failed. We had also suggested that should the pattern fail, bulls would put up a fight in the $1740 – 50 area.” The minutes release contained nothing new, so gold continues in a defensive pattern, and traders are still trying to get a feel for what the FOMC has in mind for the September meeting. Most believe a ¾ point hike is in order, anything less would confirm short-term thinking that the Fed is worried about recession. Most of today’s loss in gold was made up in the aftermarket after the minutes release, but it could not hold the gains. We are still looking at a surprisingly froggy trade with a short fuse, in these “typically quiet” summer months.

The Jackson Hole Economic Symposium will be held August 25 -27. There is talk that the Fed will use this venue to reinforce its hawkish attitude toward inflation. If that happens expect gold to continue defensive and choppy. But I think it’s more likely the FOMC will use Chief Powell to calm the waters over rising recession fears. If his live address is seen as a dovish pivot, it would encourage the bullish scenario.

On the day gold closed down $12.90 at $1760.30 and silver closed down $0.36 at $19.71.

On Thursday gold enjoyed a mild early rise but the strong dollar capped gains and it drifted towards unchanged on the day. There really is not much news that will push the gold needle at the present time. But there are plenty of rumors, including recession worries. Just stick to the FOMC playbook and you likely will be on the right side of this metals market. The Fed will continue to raise rates until it sees something tangle in lower inflation numbers.

The most optimistic bullish scenario centers on two points. The first is that the best traders can hope for is that the FOMC will approach rate hikes with caution. There is growing fear that in their hawkish approach they may overshoot their goal and create damage. The second and probably the most important is a minority opinion but worth considering. Some traders believe rate hikes are already reflected in today’s prices. Which would assume the Fed will soon turn very dovish and the metals will trend higher.

Gary Wagner’s (Kitco) technical comments are interesting if you are looking for something outside the box which also supports the bullish gold scenario. “The reader asked about a pattern called a “cup and handle”, and if recent price action in gold futures has resulted in the formation of this pattern. I agree with reader in his identification that the rounded bottom in gold followed by a period of consolidation with a downward biased can be correctly labeled as a “cup and handle” pattern. This pattern was created by William O’Neill who founded a stock brokerage company firm before launching the business newspaper, “Investor’s Business Daily” in 1984. He is the author of, “How to Make Money in Stocks”, 24 essential lessons for investment success. It was in this publication he first revealed his pattern. William O’Neill’s “Cup with Handle” pattern is a bullish continuation pattern. This pattern identifies a period of consolidation which is the precursor to a breakout to the upside.” No promises here but this is the kind of information that could easily slip by most. If gold is consolidating for another up leg, it would be no big deal. But if the long-term bull market which began in 2018 ($1200.00) was confirmed, those sitting on the sidelines could not get their money out fast enough.

On the day gold closed down $5.00 at $1755.30 and silver closed down $0.26 at $19.45.

On Friday the stronger dollar again hemmed in the price of gold in a typically choppy trade. But the pricing spread was narrow if you consider the Dollar Index pushed above 108.00. The unrelenting strength in the good old greenback has stayed with us because the Federal Reserve is on a mission to lower inflation by raising interest rates. And at this point at least, no one is sure what they might do between now and next year. I believe insiders are split – some believe the Fed will remain aggressive and the metals will move lower. Some believe the FOMC cannot afford such an aggressive policy. It is really that simple.

And what makes this picture more complicated is that Powell knows how to play the various push/pull forces to his public advantage. Which is a good thing in that it gives him and the FOMC more time to really figure out how to best handle this mess.

The probability of recession has moved from roughly 30% in June to 48% in July. But this type of odds making is rough and it’s easy to pick out sectors that support your idea. Real estate is a great example, prices are softening because financing rates are excluding new buyers. And houses take more time to sell. But is this recessionary?  A home down the block from us went up for sale and it took 2 months to sell. It used to take two days, but it went for more money than the original owners could have imagined. My point being that I do not think there is anything structurally wrong with stocks or real estate. They will simply adjust to a new environment.

The world is not coming to an end and the government will finance this latest “free money” escapade in the usual way. By inflating the fiat money supply. Not to the degree that the machine will blow up. But to the extent that owning physical metals, outside the normal financial system makes sense. Even without a safe-haven fear factor ask yourself what the price of gold and silver bullion will be a decade from now and continue to avoid the day-to-day financial noise.

On the day gold closed down $7.70 at $1747.60 and silver closed down $0.39 at $19.06.

Platinum closed down $16.70 at $886.90 and palladium closed down $18.00 at $2129.00.

Zaner (Chicago) – “With an upside breakout above the 107 level in the dollar putting the index at the highest level since July 18th it is not surprising to see October gold post a lower low and approach the $1750 level this morning. In addition to pressure from a strengthening dollar gold has also encountered fresh hawkish dialogue from the Fed with two different members voicing interest in a 3rd straight 75 basis point rate hike next month. The main takeaway from the FOMC minutes appears to be that we can expect more rate hikes and that they could be aggressive. The sentiment seems to be leaning towards a 75 basis-point hike in September, although San Francisco Fed President Mary Daly said on Thursday that either a 50 or a 75-basis point hike would be appropriate. There are some who are worried about tipping into recession, but that may be the point. Initial jobless claims fell 2,000 from the previous week, the first decline in three weeks and contrary to expectations for an increase of 12,000. The Philly Fed survey increased for the first time in three months, which was another surprise to the market. All of this suggests the Fed would be more inclined towards a 75-basis point hike next month. Not surprisingly, investors continue to flee gold with ETF holdings reduced for the 5th straight session yesterday with an outflow of 82,875 ounces of gold, which lowers the year-to-date gain in gold holdings to only 2.6%. However, in a positive note, silver ETF holdings saw an inflow of 569,890 ounces. While the information is “old” India reported gold imports increased 6.4% in April through July relative to year ago levels ported because of healthy jewelry demand. It should also be noted that Swiss gold exports to China reached 80.1 tonnes, their highest level since December 2018. These are bullish demand numbers, but the market is also worried about China’s problems with Covid and their severe heatwave.”

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