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Gold – Defensive. And Then Some

Gold – Defensive. And Then Some

Commentary for Friday, July 8, 2022 ( – Gold closed up $2.70 at $1740.60 and silver closed up $0.05 at $19.17. I think gold traders were again happy to have a hopefully quiet weekend to get away from all the drama. Gold opened this morning rather flat, basically ignored a positive jobs report which should have created some sort of downdraft. And then drifted higher as the Dollar Index lost a half point in early trading but still held the massive 107.00 level. Gold pushed back to the $1750.00 level by midsession, but traders again sold the rally. We finish the day with light, short covering action. The technical picture for gold and silver remains bearish. Especially as the Fed will likely deliver a 3/4% interest rate hike by month end. Expect a continued defensive market, perhaps with some light bargain hunting. But investors are waiting for the other shoe to fall. The plus here if you are optimistic is that the bad news is out, so trading psychology may at least improve on the shorter term. But this remains a heavy trade without fresh bullish news. Last Friday gold closed at $1798.90 / silver at $19.60 – on the week gold moved lower by $58.30 and silver was down $0.43.

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On Monday the US precious metal markets were closed for Independence Day.

On Tuesday gold continued to move lower over the anticipation of higher interest rates. This looks like a momentum pile on in the paper market as the short trade anticipates more price damage to both silver and gold. They could be right. But this reasoning, after the long weekend might be a bit more tenuous than traders suspect. I usually question the obvious – yes, most metals traders expect lower prices. And fear of another ¾ point rate hike looks like a sure thing. And higher interest rates push investor dollars into treasuries and away from gold.

Before you jump out the widow consider that everyone knew gold would continue to adjust according to FOMC intention. And consider this Barron’s dynamic. The Euro dives to a 20-Year Low Against the Dollar, Blame Russia and the ECB. The weaker the euro the less competitive the US is with Europe. And there is still no legitimate plan to account for the disruption of the two-way market between Russia and the EU. No plan equals more inflation. The problem with this dynamic is that current trader focus is on the deteriorating technical picture.

Still inflation variables while ignored for the present are all over the place. And many have little to do with the FOMC intentions. Now consider that the short paper trade is notoriously dicey. The run to the short side was prompted by a massively strong Dollar Index, now looking at 107.00! That is almost a 2-point jump over last week’s already strong average of 105.00. These factors suggest an unstable bear market raid. This does not mean gold is out of the woods, the jobs report this Friday could encourage this bearish conversation. But a miss would provide breathing room for the bulls. The important point here is that gold is trying to figure out fair value in a higher interest rate environment which is plagued with rising inflation.

On the day gold closed down $37.10 at $1761.80 and silver closed down $0.55 at $19.05.

Anna Golubova (Kitco) – Gold price erases $35 on U.S. dollar strength, all eyes on FOMC minutes, jobs data – “The precious metals market was in the red Tuesday, with gold tumbling $35 as the U.S. dollar index surged to 20-year highs and markets focused on the Federal Reserve’s meeting minutes and the U.S. jobs report. Gold saw a sharp selloff after falling below $1,800 an ounce. August gold futures were last at $1,766.50, down $35 on the day.

“The firm U.S. dollar has caused the gold price to nose-dive further, with the result that it dropped noticeably below the $1,800 per troy ounce mark,” said Commerzbank analyst Carsten Fritsch. The U.S. dollar index climbed to 106.66 Tuesday, once again rising to 20-year highs. The greenback was also trading at 20-year highs against the euro. Investors are flocking to the U.S. dollar as a safe-haven currency after the Federal Reserve embarked on a very aggressive tightening path to get inflation under control. Stocks also plunged Tuesday, with the Dow falling 2.3%, the S&P 500 dropping 2% and the Nasdaq down 0.9% on the day.

All eyes are on the FOMC minutes from the June meeting, with markets looking for clues related to the upcoming rate hike path and any new recession comments from the Federal Reserve members. The minutes are scheduled to be released Wednesday. “The June FOMC minutes may tilt the balance towards markets fully pricing in a 75bp rate hike at the end of this month, should there be some indication of a growing consensus at the June meeting,” ING FX strategists said.

The CME FedWatch Tool shows an 85.6% chance of a 75-basis-point rate hike at the July meeting and only a 14.4% chance of a 50-basis-point hike.

The U.S. dollar is likely to keep its strength while another 75bps is on the table. The only thing that could change this hawkish view would be a concerning jobs report from June (to be released Friday) or slowing inflation data. “The Fed has made it clear that it is resolutely focused on getting inflation under control so we will either need to see a very weak jobs report, published on 8 July, or, but quite possibly together with, a surprise drop in inflation, out 13 July, that reflects declines in a broad range of categories,” said ING chief international economist James Knightley. Gold will continue to watch and react to the U.S. dollar, but a break below $1,780 puts gold in a dangerous zone.

“This range would imply that gold would succumb to the weight of the most hawkish central bank regime since the 1980s. This scenario implies that a sustained downtrend could form in gold should the large CTA selling program catalyze a breakdown in prices,” said TD Securities global head of commodity strategy Bart Melek. “After all, as central banks face a credibility crisis, they could remain committed to their battle against inflation and keep rates elevated for longer than recession odds would otherwise imply.” According to Melek, bias remains to the downside in gold as the precious metal looks for support below $1,800 an ounce. On the physical side, gold demand could see some hurdles as India increased the basic import duty on gold from 7.5% to 12.5%. “[This was done] to control foreign currency outflow as the Indian Rupee plunged to a record low against the U.S. Dollar. India is a major importer of gold, with imports of around 107 tonnes in May. Higher prices in the local market are likely to weigh on gold demand in the immediate term; especially when higher interest rates have increased the relative cost of procuring and holding gold,” warned ING’s head of commodities Warren Patterson.

On Wednesday gold continued lower reacting to several more “worry” factors. Crude oil fell to $96.00, contributing to the notion that worldwide recession is a possibility. Traders are convinced, and they are probably right that the FOMC will raise interest rates ¾ of a point by the end of this month. The ISM (Institute for Supply Management) suggests solid growth which may even encourage an already hawkish Federal reserve. Nothing encourages the short paper trade more than the further erosion of both gold and silver prices. Finally, Treasury yields on two-year notes are higher than those of 10-year notes. This yield curve inversion has in the past preceded US recessions. Gold is looking at a 9-month low as silver approaches a 2-year low and it does not make sense to argue with the figures. But don’t marry them, both markets are oversold in my opinion. This adjustment will help the bullish “value” assessment as inflation focus returns.

On the day gold closed down $26.90 at $1734.90 and silver closed up $0.04 at $19.09.

Zaner (Chicago) – “With the dollar posting fresh highs overnight and market anxiety moderating, the path of least resistance remains down in gold and silver again today. Not surprisingly, investors continue to shed gold and silver ETF holdings with the year-to-date gain in gold holdings now up only 6% and silver holdings falling 4.1% year-to-date. As if market action was not enough bearish news for gold and silver, Bloomberg overnight pointed out gold’s latest failure to behave like a flight to quality instrument in yesterday’s recession inspired physical commodity market washout. In another bearish development, Citigroup has forecast commodity prices have peaked but will remain elevated. Since gold and silver have not tracked tightly with the ebb and flow of inflationary expectations, today’s ISM services paid reading and the job openings and labor turnover report won’t support gold unless the net take-away is a tempering of fears of unrelenting rate hikes. In the end, the washout in gold and silver prices yesterday was justified by a significant market psychology shift into wide held recession expectations which were then combined with a small measure of deflationary fear. Obviously, massive declines in physical commodities like crude oil, gasoline, diesel, natural gas, grains, and pork created a downdraft for physical commodities suggesting gold and silver are likely to see physical and investment demand contract even further. The gold market remains so negative toward prospects that a tripling of Indian gold imports last month (from year ago levels) was a complete nonevent. A 49-ton gold import tally in June is half of normal monthly gold imports, and therefore the modest rebound from a period of very low Covid demand should not be seen as a sign of a pattern toward better demand. In fact, Indian gold imports in the first half of 2022 were only 335 tonnes compared to 493 tonnes in the previous year. Going forward, widespread global recession fears combined with widely accepted central bank tightening leaves the US dollar as the destination for liquid capital and that merely adds to the pressure sitting on gold and silver prices. Like gold, the silver market has plunged sharply in a move that rushes to factor in recession with both investment and physical demand for silver expected to contract further.”

On Thursday gold was choppy and higher on the open but eventually the rally sold off and it settled only mildly higher. This pattern looks like book squaring as the short paper took profits in this still turbulent market. Crude oil is also mildly higher which helped the bulls gather themselves. Reuters claims higher prices are the result of bargain hunting, but this is premature considering the shellacking the metals have seen recently. “We’re seeing some good old-fashioned bargain hunting after gold’s dramatic sell-off. There is clearly some interest in buying on dips after yesterday’s move into the low $1,700s,” said David Meger, director of metals trading at High Ridge Futures.” It is also possible that the bulls saw something in the notion that the Dollar Index has at least stopped rising. But this is a bit of a reach considering the index is steady at a whopping 107.00. Still any relief from a dramatically falling market is welcome.

The adjustments in the price of gold you have seen lately are certainly a reaction to higher interest rates. But the size of the price drop is also a function of the cost of money. Large firms spend millions of dollars on proprietary software which tries to answer the more immediate shorter-term question of value. That is why, you often see a “step up” or “step down” adjustment in price as we move further into this new and tighter monetary policy.

Based on this notion, if the Fed keeps raising interest rates the metals should continue lower, especially if the technical guys keep sending out “sell orders”. It is for this reason that I take the notion of “bargain hunting” with a grain of salt. The bulls claim all this sounds reasonable. But ask what do you do when there is little room for more adjustment? The steadfast bullish argument has always been that at some point the “value” of gold will reclaim its rightful place. Simply because the world will begin to fear dollar hegemony. You are now right in the middle of this old argument. And it remains to be seen if the Fed can unwind its problematic balance sheet. Axel Merk put it nicely during an interview with David Lin – “Gold hasn’t changed, the price of gold has changed.” Don’t dismiss this as a throw away comment, Merk is offering wisdom.

On the day gold closed up $3.00 at $1737.90 and silver closed up $0.03 at $1737.90.

On Friday gold looked tired but the robust jobs report may suggest a recession is not right around the corner. We could be looking at something in middle. Stagnant growth with modest inflation. This would not be the typical “stagflation” scenario we saw in the 1970’s when the price of gold soared, because we do not have high unemployment. But the problem with this scenario is that crude oil is really a wild card as the Ukrainian war, already a catastrophe seems to have no end in sight. And the Russians become more isolated and belligerent. Still, I expect a continued bumpy ride for the metals, as traders continue to “guess” where the Fed will land between now and the middle of next year. The physical market from our point of view has seen some selling at these blow-out levels. But in general, the public remains a resolute buyer of traditional bullion coins, especially for immediate delivery.

On the day gold closed up $2.70 at $1740.60 and silver closed up $0.05 at $19.17.

Platinum closed up $17.60 at $894.00 and palladium closed up $163.80 at $2151.20.

Zaner (Chicago) – “The path of least resistance remains down despite the massive short-term oversold technical condition in gold. Unfortunately for the bull camp, the dollar remains near contract highs with the currency trade viewing the dollar as an ongoing dominating force. Not surprisingly, the release of the Fed June 14/15th meeting minutes provided fresh hawkish/bearish gold dialogue as the committee discussed the potential for even more restrictive policies to bring inflation under control. In addition to the massive exodus of long futures and option positions yesterday, gold ETF holdings saw a sizable 342,688-ounce reduction and year-to-date gold holdings are now up only 5.6%. Yet another sign of soft investment interest came from the Perth mint which indicated June gold coin and minted bar sales declined by 34% on a month over month basis. In an even more pronounced sign of negative investment interest toward precious metals silver ETF holdings yesterday saw a massive outflow of 13 million ounces bringing the year-to-date contraction in holdings of to 5.6%. While the net spec and fund long positioning in gold (adjusted for the slide of $91 following the COT report) has likely put the net spec and fund long in gold down to the lowest level since April 2019, one could also say that the net spec and fund long has only returned to the midpoint of its historic long range. In other words, the gold market from one technical measure has not registered a mostly liquidated signal yet. From a fundamental perspective, bearish fundamentals continue to rain on the bull camp with the dollar posting fresh contract highs daily, commodity prices periodically plummeting and India recently raising its gold import taxes. Even though gold failed to rally in sync with rising inflation expectations (peaking in March of this year), it is entirely possible that gold will now see additional pressure from deflationary fears arising from widely held recession expectations. On the other hand, despite the massive June washout in gold, open interest has held around the 500,000-contract level as if the market has reached fundamental value and extracted large percentage of weak handed longs from the equation. Unfortunately for the bull camp, macroeconomic/overtightening views will likely pressure gold into next week’s US CPI release (July 13th) as that could be the official peak in classic inflation measures and in turn the peak in over tightening expectations. The next critical support point in August gold is $1,729.80 followed by a more extreme low down at $1,710.20.”

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