Gold – Buckle Your Seat Belts
Commentary for Friday, May 5, 2023 (www.golddealer.com) – Today gold closed down $30.60 at $2017.40, and silver closed down $0.30 at $25.74. The price of gold dropped from $2035.00 to $2000.00 Friday morning in the domestic New York cash market. Traders bought the dip but the bounce to higher ground lacked conviction. This sudden fall from grace was the result of factors, which include profit taking, and a better-than-expected jobs report. I also suspect a general trader’s suspicion that gold has moved “too high, and too fast” considering the upcoming FOMC intentions. We move into the weekend a bit left-footed. The fact that gold is still holding above $2000.00 is a bullish plus, but such a large drop may take some of the heat out of the physical demand. Traders usually welcome this kind of settling as reasonable caution at these higher levels pays dividends and gold ponders its next move. Last Friday gold closed at $1990.10 / silver at $25.00 – on the week gold was up $27.30 and silver was up $0.74.
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On Monday the price of gold drifted lower in the overnight Hong Kong market but caught a solid bottom at $1978.00 as the trend turned higher through the London market. And, not surprisingly moved quickly higher ($2005.00) in New York before the paper trade sold the rally and gold once again turned defensive on both sides of $1985.00.
The Reuters headline will point you in the right direction – Gold gives up gains as robust US data counters banking woes – “Gold gave up all of its gains in volatile trading on Monday after better-than-expected U.S. manufacturing data in the run-up to the Federal Reserve’s rate hike decision this week. U.S. manufacturing pulled off a three-year low in April as new orders improved slightly and employment rebounded, while construction spending increased more than expected in March, boosted by investments in nonresidential structures. Heading into the U.S. session earlier, gold prices had rebounded to touch $2,005 as traders took stock of news that JPMorgan Chase & Co (JPM.N) would buy most of First Republic Bank’s assets after regulators seized the troubled lender over the weekend. “The move was definitely premature… We used some of that opportunity to try and capitalize on taking some positions off on that move upwards,” said Phillip Streible, chief market strategist at Blue Line Futures, in Chicago.
The Federal Open Market Committee (FOMC) will meet on May 2-3, and markets largely expect a 25-basis-point interest rate hike. Investors will also focus on Fed Chair Jerome Powell’s press conference to assess if the commentary pushes back market expectations of rate cuts before the year-end amid the recent banking turmoil and threats of an imminent recession.”
It is fair to say that “robust economic data counters banking woes” because “banking woes” in my opinion serves a purpose. They underline weak points in our banking system that need correction before they can turn into something more serious.
The fact that gold once again ran into tough overhead resistance above $2000.00 should not be surprising. We have seen this pattern many times in the past few months. And even with all this “trading noise” gold is still holding out at the higher end of its recent trading range.
The theoretical crosscurrents in this trade are well known and threatened to upset the apple cart on a regular basis. But there are two factors which should especially hold your attention. Will the Fed continue to raise interest rates and will those rising interest rates push the US into recession?
On the day gold closed down $6.70 at $1983.40, and silver closed up $0.01 at $25.01.
On Tuesday gold prices were rather flat in the overnight Hong Kong and London markets but pushed dramatically higher in the New York domestic trade as job openings data “missed”, prompting some to suggest that March may be the beginning of an economic slowdown. This information comes from the JOLTS report (Job Openings and Labor Turnover Survey) and the numbers were weaker than expected but I think it may be premature to call this a “trend”.
Most in this industry expect a quarter point hike by the FOMC this Wednesday, which will likely put gold back on the defensive as traders expect further rate hikes. On the other hand, if this potential “economic dip” shows signs of development and inflation cools the Fed may decide a heavy hand with interest rates is not necessary. This is the “dream” scenario for the bulls.
But this “daydream” is better known as the “slowing scenario” in the gold market and has been around for some time. And each time it seems to gain momentum the Fed rains on the parade by reminding everyone that inflation is “sticky” and is not going away anytime soon.
A better measure of higher gold prices will be the results of the next FOMC confab, held on June 13th and 14th. If Jerome and colleagues “pause” in their interest rate cycle because they believe further increases will damage economic recovery the price of gold will move dramatically higher. If they raise a quarter point (my expectation) it will cap higher prices in gold but likely will not create drama because this hike is already baked into the cake. If they bring their “inflation hammer” down with a half point rise in interest rates the gold bulls will not be happy.
Keep in mind that this “view” is limited. There are many reasons for gold to move higher, perhaps dramatically higher which are outside the control of the FOMC. But that story is one for another day and if these cross currents develop, they will be easily identified.
On the day gold closed up $30.90 at $2014.30, and silver closed up $0.39 at $25.40.
Zaner (Chicago) – “While the gold market is showing very little direction this morning and is also exhibiting very little in the way of volatility that is likely to change within the next 36 hours with the Fed decision tomorrow likely to set a near term trend for prices. However, we think the silver market will diverge with gold with classic physical commodity market fundamentals driving silver prices. Unfortunately for the bull camp in gold, the dollar index appears to be poised to breakout to the upside of a 3-week sideways consolidation pattern today perhaps because of signs of negotiating in Washington to avoid a government shutdown. On the other hand, the US Treasury Department surprised the trade with news that the US could default earlier than expected on June 1st without a debt ceiling hike. Obviously, both gold and silver see some pressure from the Australian interest rate hike overnight and from chatter overnight that factory activity in the euro zone weakened and rekindled recession chatter. Yesterday gold ETF holdings rose by a scant 6,300 ounces while silver ETF holdings fell by a consequential 919,524 ounces. Even though the trade is largely anticipating the US Fed to raise rates Wednesday afternoon, anticipation of that action is likely to lift the dollar today off a buy the rumor argument. A minimally supportive development overnight came from somewhat muted inflation readings from Europe. In the end, once the Fed raises interest rates, the bull camp in gold and silver will have to show they can regain control or corrective action could become quite aggressive with gold potentially falling to $1,950 over the coming week and silver prices potentially sliding down to $24.73.”
On Wednesday the price of gold was flat last night in both Hong Kong and London and the domestic New York trade was choppy, but with a mild upward drift. This is somewhat surprising considering everyone is hunkered down and waiting for the promised interest rate hike later in the day. It is not so much that rates are moving higher, the hike will likely be small, but traders are eager to see if a small hike creates much ruckus. In this case traders have made such a big deal about this next FOMC move that it will likely be a non-event.
It usually works that way, those seismic shifts which can create large trading waves are rarely seen in advance because traders are great at taking early positions which factor change into the pricing model. Exciting in the surprise sense is not something the paper trade embraces well. Wall Street trading rarely “swoops” – it trends nicely because panic threatens stability.
There really are two pieces to the “will gold move significantly higher” puzzle.
The first piece was the expected rate hike of a quarter point made public today. This was bullish for gold in that it suggests the Fed may be turning a bit more cautious relative to higher interest rates. That is good news for bullish gold sentiment today.
It is the second puzzle piece that has me worried. Chief Powell’s live comments today remain hawkish. Jerome stated, “We have a long way to go to bring down inflation”. This kind of talk does not hint at a slowdown in interest rates. It remains difficult to see gold reaching new highs, especially if the Fed feels that inflation is still a serious problem.
Reuters (Howard Schneider) – Fed likely to hike rates, hint at pause in tightening cycle – “The Federal Reserve is expected on Wednesday to raise interest rates and perhaps signal a pause in its 14-month tightening cycle, as policymakers balance the need to slow inflation against a pressing set of risks ranging from bank failures to the possibility of a U.S. debt default as soon as next month. Investors anticipate the U.S. central bank will follow through with a quarter-percentage-point rate hike at the end of its latest two-day policy meeting. The policy statement is due to be released at 2 p.m. EDT (1800 GMT), with Fed Chair Jerome Powell scheduled to speak to reporters half an hour later. But the new statement, and Powell’s elaboration on it, will have to reconcile a set of risks that have grown more into conflict.
Inflation has been falling only slowly, leaving some Fed officials unconvinced that interest rates have moved high enough to truly control it; yet the economy itself appears to be weakening, a trio of recent bank failures has raised concern about broader trouble in the financial sector, and the unsettled nature of debt limit talks between Republicans in Congress and the Democratic-controlled White House could trigger an acute crisis if the U.S. government is forced to stop paying its bills. As of March, 10 of 18 Fed policymakers indicated they were likely ready to halt the rate hikes after one more increase, expected at this week’s meeting, lifts the Fed’s benchmark overnight interest rate to the 5.00%-5.25% range. Between that consensus and other problems that have intensified in the meantime, the Fed is likely to at least open the door to the prospect that this hike will be the last of the current tightening cycle, absent a future inflation surprise.
Just as the central bank had to grapple at its March 21-22 meeting with the fallout from the failures of Silicon Valley Bank and Signature Bank, policymakers this time had to assess the collapse of First Republic Bank and determine if the financial sector faces broader turmoil or is likely to make credit even less accessible and more expensive than the Fed feels is necessary to cool inflation. The tradeoff for moving forward with a rate increase this time “may be that Powell has to adopt a less forward-leaning tone in terms of prospects for additional tightening at the following meeting,” Krishna Guha, a former New York Fed official who is now vice chairman of Evercore ISI, wrote in a note ahead of the policy decision.
Hints about the Fed’s direction will come first from the rate-setting Federal Open Market Committee’s new policy statement, which as of March said that the central bank “anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive” to lower inflation. That phrase is consistent with what officials outlined in economic projections issued at the March meeting, when they saw at least one further rate increase in the cards.
In 2019 and 2006, when the Fed shifted gears in an environment when it had been raising borrowing costs, it swapped language leaning towards higher rates for more neutral guidance – saying in June 2006 for example that “the extent and timing of any additional firming … will depend on the evolution of the outlook for both inflation and economic growth.”
With rate increases hardwired into the Fed’s statement since January 2022, “we think the FOMC is likely to soften its forward guidance on additional rate hikes,” HSBC analysts wrote, particularly now that the policy rate after this meeting will hit the peak most Fed officials had projected. Doing otherwise might hint that those projections had changed, a hawkish tilt towards more rate hikes that the Fed won’t want to close off but also won’t want to guarantee.”
On the day gold closed up $14.30 at $2028.60, and silver closed up $0.08 at $25.48.
On Thursday the price of gold drifted lower on the open but reversed direction and quickly moved to new recent highs ($2060.00). Safe haven demand may be getting a boost this morning as banking fears reenter the trading picture. PacWest’s stock fell 85% since the bank failures in early March as investors feared it could be the latest bank to collapse. PacWest said that unlike the recently shuttered First Republic Bank, it has not “experienced out-of-the-ordinary deposit flows (The Hill). This kind of story makes the gold trade jittery even though Chief Powell went out of his way to assure the faithful that our banking system is “sound and resilient”.
Is our banking system in trouble? Please, there is nothing wrong with our banking system – but this story is the mother of all conspiracy hacks. Expect increased volatility and profit taking.
On the day gold closed up $19.40 at $2048.00, and silver closed up $0.56 at $26.04.
Zaner (Chicago) – “In our opinion, the gold market has probably forged an intermediate top with a major blowoff range up reversal overnight. In other words, optimism about the potential for an end to the US rate hike cycle has been embraced and perhaps overdone. From a fundamental perspective, Indian gold prices posted a record high overnight and in the past Indians have been very price conscious which in turn could result in a near term demand void. However, the gold market should be supported by another inflow to gold ETF holdings of 24,688 ounces yesterday as that narrows the year-to-date decline in holdings to only 0.2%. Furthermore, the ECB is poised to raise interest rates for a 7th time in their rate hike cycle this morning, but unlike the US Fed yesterday, the ECB could raise by 50 basis points and suggest more hikes ahead which should catch gold and silver prices overdone. Despite assurances from both the US Fed and the ECB they are nearing the end of their rate hike cycle, both central banks are definitive in their views that inflation remains too high. Unfortunately for the bull camp in silver yesterday ETF holdings saw an outflow of 808,656 ounces cutting the year-to-date gain in holdings to a minuscule 0.2%. Another slightly negative overnight development came from a softer than expected Chinese manufacturing PMI reading which dampens gold demand hopes from the world’s largest consumer. Unfortunately for the bull camp, the aggressive post Fed announcement rallies have dissipated quickly as if the markets fully priced moderating hawkish intentions from the Fed especially with the rallies early this week robust ($100 in June gold and $1.34 in July silver). Traders should expect more back and fill profit-taking weakness today.”
On Friday gold was turbulent and moving to the downside. But this is a great example why it pays to ignore short-term headlines and speculation about more bank failures. It is easy to get caught up in the “daily buzz” which usually stokes the physical world. But historically this “end of the world scenario” is designed to sell newspapers. Can you imagine the public’s reaction to comments which describe the failure of Silicon Valley Bank as no big deal? They would not sell many newspapers, but the fact is that there have already been 3 large bank failures this year. Which is a drop in the ocean compared to the numbers of functioning banks in America.
This is not commentary which might suggest gold will move higher or lower. The factors needed to produce these changes are still in the “unknown bin”. But such down drafts will not seriously discourage the physical possession of gold and silver bullion in these troubling times.
Reuters (Deep Kaushik Vakil) – Gold sheds 2.5% on US jobs growth as Fed-led rally fizzles – “Gold beat a fast retreat on Friday after above-forecast U.S. payrolls data that tempered expectations of interest rate cuts from the Federal Reserve. Spot gold lost 2.5% to $2,000.70 per ounce by 10:08 a.m. EDT (1408 GMT) but was up 0.6% for the week after surging to $2,072.19 on Thursday, just shy of a record high of $2,072.49 after the Federal Reserve hinted its hiking cycle may be ending. U.S. gold futures shed 2.3% to $2,008.30. But those gains were quickly unwound as U.S. employers boosted hiring in April while raising wages. “The data will not lead the Fed to hike rates in June, but it will likely remind the rate-cut fanciers to settle a bit,” and this is pressuring zero-yield gold, said Tai Wong, a metals trader based in New York. Also weighing on gold, the dollar jumped on the jobs data, making bullion more expensive for overseas buyers. Looking ahead, any economic data “that points to a cooling U.S. economy – and therefore to rate cuts in the mid to long term – is likely to support the price of gold. Conversely, positive surprises are likely to weigh” on prices, said Zumpfe, a precious metals dealer at Heraeus. Also on the radar were developments surrounding the U.S. banking sector and the U.S. debt ceiling. Economic uncertainty and lower rates boost demand for zero-yielding gold. “If we see further panic around the debt ceiling or U.S. banks, hold on to your hats as I fear price action could get nasty around these highs and punish bulls and bears,” said Matt Simpson, analyst at City Index, warning that in “times of severe stress, all markets, including gold, can fall.”
On the day gold closed down $30.60 at $2017.40, and silver closed down $0.30 at $25.74.
Platinum closed up $18.00 at $1066.40, and palladium closed up $45.20 at $1494.80.
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