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Gold – An Upbeat Weekly Close

Gold – An Upbeat Weekly Close

Commentary for Friday, Oct 21, 2022 ( – Today gold closed up $20.20 at $1651.00 and silver closed up $0.37 at $19.04. The paper trade created a bit of buzz this morning as both gold and silver jumped higher and the Dollar Index lost 2 full points! This surprising outcome over the possibility that the Fed may soften its current inflation fighting agenda. I would not get carried away because it’s sensible to look for paper traders to sell this rally. But the metals trade at least for today seems lighter. And so does the Wall Street trade as stocks rally and negative sentiment suggests an improvement. Not to rain on this parade but it is too soon in this debate to call this the anticipated Fed “pivot”. But at least there is a fresh scenario on the table that can be tested next month. If the expected 0.75 of a point interest rate from the FOMC holds up this small rally will melt like snow on a hot day. But if the Fed decides a half point hike is a better choice bullish sentiment in the metals will be bolstered. Beware however of this Trojan horse. In January you could realize that higher interest rates are still part of the Fed’s fighting game plan. They are just going to spread them out over a longer period.       Last Friday gold closed at $1641.70 / silver at $18.02 – on the week gold was higher by $9.30 and silver was higher by $1.02.

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On Monday gold was strong overnight in Hong Kong and London. And continued higher in the domestic New York trade as the cash market moved above $1668.00 before settling on both sides of $1660.00 for the day. The strength was created as the Dollar Index lost more than 1% of its value in the early morning trade. Reuters also suggests a rise in safe-haven demand for gold as geopolitical risks continue to mount. TD Securities – “In the near term, however, the recovery in risk assets bolstered by signs of stabilizing gilts is raising pressure on precious metal shorts, but gold prices need to break above $1,750/oz to extend the short squeeze.”

The rumor-mill this week is typical. Some analysists suggest the Fed and the market are low-balling the potential of higher interest rates (FX Empire). That is possible and if these folks are correct the paper trade will soon be dealing 5% + interest rates. Which will increase the pressure on gold and silver prices as investors buy Treasuries following strong guaranteed returns.

It is tough to argue with this scenario – gold is struggling against higher interest rates. But the value of gold in an inflationary world should not be ignored for two reasons. The first is simply that today’s bounce to higher ground does support the notion that gold is carving out a reliable bottom even in the face of negative news. The second reason is that gold has survived in a higher interest environment. Through a combination of safe-haven interest created by the disconnect between EU problems and the escalation of war in the Ukraine.

Still, this latest jump in the price of gold saw about half of today’s gain lost in the aftermarket suggesting traders selling the “rallies” and buying “dips”. We are still in the middle of this latest interest rate storm. But to overlook the value of physical gold and silver bullion at these discounted prices could be perilous if the inflation genie is already out of the bottle.

On the day gold closed up $15.30 at $1657.00 and silver closed up $0.65 at $18.67.

Grant on Gold (Zaner) – “(1) Gold ended last week with a 3% loss after data confirmed that the Fed has yet to get a handle on inflation. (2) Silver plunged 9.2% last week, erasing most of the gains recorded in the previous two weeks. (3) Platinum closed down 1.9% last week, but price action was confined to the previous week’s range. (4) Palladium is displaying a softer tone within its range as recession worries, inflationary prices, and higher interest rates conspire to sap auto demand.”

On Tuesday gold drifted lower in the New York cash market, unable to build on yesterday’s modest rise in prices. Even as the Dollar Index came off weekly highs which suggests that negative sentiment and the bearish technical picture remains the primary trading focus. Gold pushed to highs on the day ($1657.00), in what looks like mild short covering but drifted lower finding daily support at $1646.00. By the end of the day gold managed to claw its way back to familiar support ($1650.00) but this remains a heavy trade and the bear continues to roar.

I have said for some time that the price of gold would likely trade between $1600.00 and $1650.00 as this market adjusts to higher interest rates. And the downside in gold at these new lower levels would be limited using the following reasoning. Today the yield on 10-year Treasuries is 4% +, more than enough to slow down the US economy and unwind a cheap money policy in place during the pandemic. The academic community are split over this issue, but many thinkers believe the Fed will come to a similar conclusion, which is already foreshadowed in England as our friends across the sea choose a less obtrusive route to control spending.

New York Times – LONDON — In a stark retreat, Prime Minister Liz Truss of Britain on Friday fired her finance minister and partly reversed a tax plan that had rattled global financial markets, unsettled investors and set off a spiraling crisis that still threatens her political survival. In a brief news conference from Downing Street, she vowed to raise the country’s corporate tax rate after promising last month not to do so. The increased taxes will help pay for other tax cuts she had initiated and are meant to calm investors, who worried that the cuts were unfunded. “It is clear that parts of our mini budget went further and faster than markets were expecting,” Ms. Truss said, adding, “We need to act now to reassure the markets.”

On the day gold closed down $8.00 at $1649.00 and silver closed down $0.10 at $18.57.

On Wednesday gold pushed to 3-week lows as the Dollar Index (113.00) gained a full point since Tuesday’s low (112.00). This latest dip looks more like a bear raid than anything else, but it is tough to figure because these discounted prices should have brought in safe haven buying from both China and India. Today’s pricing route began at $1650.00 and settled on the day around $1630.00. Not the end of the world but enough of a wrinkle to suggest more confusion.

Still, the negative sentiment waterfall is not new and for now remains unrelenting. Traders are convinced the Fed will forge ahead with still higher interest rates. The fact that the FOMC has done little to encourage the notion that a “middle ground approach” is a consideration has become a nagging loose end. It reminds me of an old story my Mom used on occasion – a warning about bulls in the China closet. “It is widely believed that the phrase came about from real-life situations when cattle were brought to the market in London in the 17th century. The beasts would stray into nearby China shops and played havoc with the items. The earliest recorded use is in Frederick Marryat’s novel, ‘Jacob Faithful’ (1834).

It is difficult to imagine negative sentiment getting worse, which helps the contrarian theory – “prices are bottoming as all the sellers have sold”. But what the bulls need is news that the Fed will not overreact in its fight against inflation. The “overreaction” theory has underscored bearish sentiment since economists suggested months ago that the Fed was “behind the inflation curve”.

The technical picture from expert Jim Wycoff (Kitco) “Technically, the gold futures bears have the solid overall near-term technical advantage. Bulls’ next upside price objective is to produce a close above solid resistance at $1,700.00. Bears’ next near-term downside price objective is pushing futures prices below solid technical support at the September low of $1,622.20. First resistance is seen at today’s high of $1,659.50 and then at this week’s high of $1,674.30. First support is seen at $1,630.00 and then at $1,622.20.”

“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 $20.00. The next downside price objective for the bears is closing prices below solid support at the September low of $17.40. First resistance is seen at today’s high of $18.755 and then at $19.00. Next support is seen at this week’s low of $18.155 and then at $18.00. Wyckoff’s Market Rating: 2.0.”

On the day gold closed down $21.50 at $1627.59 and silver closed down $0.23 at $18.34.

Zaner (Chicago) – “While the dollar index is trading higher early this morning that action does not appear to be the primary force behind the sharp slide in gold prices. In fact, red hot inflation readings from the UK (a 40 year high) and talk of aggressive rate hikes from several central bankers has flooded the headlines and that has knocked gold sharply lower. Reports are the ECB plans to implement another jumbo hike next week, the Minneapolis Fed Pres. indicated the benchmark policy rate in the US will have to rise above 4.75% and the BOE has indicated they will begin selling bonds on November 1st. Therefore, surging interest rates are likely to dominate gold and silver with the dollar adding into the selling environment. In conclusion, a continuation of dollar strength in the face of spiking interest rates could quickly throw December gold to and perhaps below the October low down at $1,622.20. Yesterday, the gold market saw a forecast for a 13% cut in gold output from one miner which would result in the lowest production since 2015. On the other hand, Turquoise Hill raised its fiscal year gold output, but the increase was not as large as the decline in output from the other miner reporting production figures yesterday. While the markets were not expecting the Russians to buy gold for their reserves, the Russian Finance Minister indicated now would not be a good time for Russia to buy for gold reserve holdings. Even though the markets are expecting Indian festival-inspired gold buying over the coming 2 weeks, it could take a return to the September lows, along with a jump in the value of the Indian currency for Indian buying to have a material upside impact on gold prices. Recently Indian gold jewelers expected festival sales this year to hold steady with last year’s post Covid related rebound. In conclusion, we are bearish toward gold, but acknowledge an already heavily liquidated net spec and fund long position which could bring about an exhaustion low later this week. In a positive development, gold ETF holdings increased minimally yesterday while silver ETF holdings posted another large inflow of 1.1 million ounces.”

On Thursday gold presented a typically wobbly market, choppy on the open but generally higher as the dollar weakened. The Dollar Index opened around 113.00 and trended lower, moving towards 112.00 which prompted higher gold prices. This gave the bulls a little breathing room from yesterday’s weakness. The New York cash market moved from $1625.00 through $1645.00 before the paper traders sold the rally and the markets closed mildly higher. The rumor which prompted dollar weakness was that Japan might sell dollars to support the yen. Not an uncommon move between countries looking to offset trade imbalances created by the dollar.

But this is another example of “unforeseen” fallout which many believe will become common worldwide as central banks adjust to post pandemic conditions. And damage from war in the Ukraine becomes permanent. Examples on our side of the world include fallout as the Fed backs away from the pandemic free lunch financial model. Within the EU, the mess that the Bank of England has created comes to mind. Here, the government must seriously intervene to protect the pound. They will worry about inflation later. And Russia can now openly threaten Europe over energy delivery as Moscow feels threatened over further unilateral sanctions.

It would also appear that yesterday’s swoon in gold prices was helped by Minneapolis Federal Reserve Bank President Neel Kashkari’s inflation comments: “But if we don’t see progress in underlying inflation or core inflation, I don’t see why I would advocate stopping at 4.5%, or 4.75% or something like that. We need to see actual progress in core inflation and services inflation, and we are not seeing it yet.” Most Fed policymakers expect to need to raise the policy rate, now at 3%-3.25%, to 4.5%-5% by early next year, based on projections published last month and comments made publicly since then Kashkari’s remarks signal a readiness to go even further. “That number that I offered is predicated on a flattening out of that underlying inflation,” Kashkari said. “If that doesn’t happen, then I don’t see how we can stop.” (Reuters)

On the day gold closed up $3.30 at $1630.80 and silver closed up $0.33 at $18.67.

Zaner (Chicago) – “While the December gold contract managed to reject the initial lower low for the move overnight and the Dollar is lending some initial support, the path of least resistance remains down with an upside breakout in US treasury yields to the highest levels since the financial crisis in 2008 dominating market sentiment. In fact, investors yesterday continued to pull money from gold and silver ETFs leaving traders and investors negative toward the sector. Apparently, sentiment in gold is so negative that reports of a 43% jump in September gold shipments from the key European gold refining hub Switzerland failed to provide support. Swiss gold exports to India in September rose 79%, shipments to China increased by 16%, and sales to Turkey rose by 36%! With a major Indian festival gold demand window just ahead and gold prices near two-year lows, we suspect Indian bargain hunting buying will present in the headlines in the coming sessions. However, given bearish big picture outside market conditions a temporary buying wave is not likely divert the market from the downside. With the gold market seeing its net spec and fund long jump 45,000 contracts in last week’s report, the sharp failure at the $1,650 level this week might have been stop loss selling from bottom picking late last week off the temporary consolidation at $1,650. On the other hand, into the low today, the December gold contract was trading $50 below the level where the last positioning report was measured and that could mean the net spec long has been brought down to the lowest levels since May 2019. Unfortunately for the bull camp, technical signals for a major low are likely to be overwhelmed by ongoing bearish fundamental forces. In the near term, we see December gold headed below the late September low down at $1,622.20. Relatively speaking the silver market has held up impressively in the face of this week’s washout in gold with the December silver contract holding well above last week’s lows again this morning. While the $18.00 level might be seen as some form of value, fundamentals for a solid bottom are not apparent!”

On Friday gold was flat in overnight Hong Kong and London trading but rallied early in the New York domestic market, bouncing off overhead resistance at $1645.00. This rather erratic gold pricing was helped by dramatic changes in the value in the dollar. The Dollar Index touched 114.00 in the early trade but quickly lost steam – settling around 112.5 for the day.

It is difficult to say what created higher gold prices going into the weekend. But even short-term bullish optimism is welcomed these days. And higher gold is probably related to two factors. First, this market is oversold, anything that sounds promising will get attention. Second, and more importantly Reuters said this morning that the Federal Reserve will debate the coming December interest rate hike. “Some Fed officials have begun sounding out their desire to slow down the pace of increases soon, according to the Wall Street Journal, and how to signal plans to approve a smaller increase in December. “The hopes that the Fed may temper or take the foot off the gas pedal slightly is helping the market,” said Andre Bakhos, managing member at Ingenium Analytics LLC in Plainsboro, New Jersey. Stock markets have been hammered by worries of aggressive rate-hiking cycle tipping the U.S. economy into a recession, with the benchmark 10-year U.S. Treasury yield hitting fresh 15-year highs earlier in the session.”

Some traders claim this is the first step towards a modified Goldman Sachs scenario which early on suggested gold would see $2,250.00 by 2025. Too optimistic for my tastes but you must give them credit for at least thinking out the box in this new rising interest rate world.

On the day gold closed up $20.20 at $1651.00 and silver closed up $0.37 at $19.04.

Platinum closed up $24.50 at $954.60 and palladium closed down $74.10 at $1995.70.

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