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Gold – Defensive to Choppy

Gold – Defensive to Choppy

Commentary for Friday, February 7, 2020 – Gold closed up $3.50 today at $1568.60. It was choppy all day moving from $1564.00 on the open through a high of $1574.00 and finishing up a few dollars into the weekend. Last Monday we closed at $1577.20 so with today’s close at $1568.60 we have lost $4.68 on the week. This may sound like nothing is going on but believe me this market has plenty of tension right beneath the surface.  

Our shiny friend may be telling us that even if you don’t like the recent $1590.00 sell off which quickly led to a $40.00 price drop – this market is still in the game. And even if you are a pessimist the recent $1550.00 bottom has remained intact since early January.

Many should now be asking why paper players did not “sell” and move to the sidelines, waiting for this storm to pass when this latest bullish leg began around $1460.00? There is certainly plenty of profit in this trade but there may also be a feeling creeping in around the edges that this mighty $40.00 drop was a bit overdone.

And so, traders “bought the dip” which is kind of a magic phase if you are looking for the logic behind these surprisingly steady prices. Whether this latest longer-term bullish run was damaged or not still remains to be seen. But it would not take much to now reestablish that “feeling” that this market has legs and the hopes of $1600.00 or even $1700.00 in 2020 was not pie in the sky.

If you are a full-blown gold bull, you believe the world financial system is broken. A full-blown bear thinks stocks are the only place to be and is willing to ignore world debt. I’m somewhere in the middle but the fact that no central bank is now willing to begin paying back the huge sums of money borrowed over the past decade is troubling.

In a recent post by FEE (Foundation for Economic Education) Burton Folsom makes several important points, the most important being that regardless of political party, modern presidents have doubled the national debt every 9 years. If this trend continues through the end of the 21st century it will be $9 quadrillion or $10 million dollars per person.

I’m always suspicious of this kind of math but it is true that governments in the form of central banks have no problem printing more paper money when they need an economic boost but always have trouble paying the money back.

This one-sided ledger keeping has not toppled our financial boat to date which is why we keep following this economic recipe and the ownership of gold and silver bullion is not taken seriously in the United States. But it’s a common theme in the precious metals business that this type of mismanagement cannot continue forever without consequences. So for my money I would like to make a few small plans for something that may not occur (paper money collapse) than to wake up one morning regretting that I ignored old Ben Franklin’s timeless warning that “an ounce of prevention is worth a pound of cure”.   

This from Zaner (Chicago) – “Global equity markets overnight were lower with some surprising minimal gains posted in Shanghai markets. Surprisingly the Chinese markets were able to show some positive action in the face of growing admissions from Chinese officials that the Chinese economy was taking a severe hit from the virus. However Chinese economic data for January released overnight (with the exception of imports) did not show noted weakness. From Japan coincident index readings came in softer than expected while there leading economic index came in stronger than expected. Unfortunately German industrial production contracted significantly and in turn fostered fresh talk of a return to recession. Germany also posted disappointing export and import data for December while France also showed a significant contraction in industrial output of 2.8%. However French nonfarm payrolls in the quarter were up 0.2% and Italian retail sales came in stronger than expected! From the UK Halifax house prices gained more than expected with a 4.1% gain. The North American session will start out with the January employment situation report. January non-farm payrolls are forecast to have a modest uptick from December’s 145,000 reading. January unemployment is expected to hold steady at 3.5% while January average hourly earnings are forecast to have a minimal uptick from December’s 2.9% year-over-year rate. January Canadian unemployment is expected to hold steady at 5.6% with a modest increase in their net employment. December wholesale trade is forecast to hold steady with November’s reading. The January Canadian Ivey PMI is expected to have a moderate uptick from December’s 51.9 reading. December consumer credit is forecast to have a modest increase from November’s $12.5 billion reading. Earnings announcements will include AbbVie, FirstEnergy and CBOE Global Markets before the Wall Street opening.

While overnight infection counts were not shocking it does appear as if fears of very negative economic consequences inside China are beginning to escalate. In fact the Chinese central bank has promised to take additional action again and have suggested their priority is to cushion the economy over control of their debt levels. On one hand the April gold contract has forged a 3 day high early and appears to be leaning in favor of the bull track, but ongoing new high for the move action in the dollar is probably limiting early gains. We suspect that the focus of the gold trade will shift to the US nonfarm payroll results before shifting back toward the potential developments in China over the weekend in the afternoon trade. Expectations for today’s US nonfarm payroll reading call for a gain of around 160,000 and a reading at or above that level would likely cause some temporary selling of gold. However there have been some analysts warning that the payroll reading today could come in softer than expected due to production changes at Boeing. Overnight gold ETF’s added to holdings for 12th straight session bringing net purchases this year to 1.65 million ounces. Silver ETF’s also added to their holdings bringing this year’s net purchases to 2.61 million ounces. In the end, we give the bulls an edge with a critical pivot point at $1576 potentially setting the tone for the rest of the Friday trade. Traders might consider being long gold and short silver as a strategy to play for renewed safe haven buying, with the short’s silver component possibly protecting the long gold position against any return to the deflationary/slowing physical demand environment from earlier in the week.

With the palladium market showing very little correlation with fundamental forces lately and showing multiple recoveries from large corrections over the last six months, it is very difficult to predict today’s action. However we think the massive reversal from this week’s highs combined with surging views that the Chinese economy is headed to at least a moderate slowdown has turned the tables against the bull camp. We might also suggest that the market might have seen a bullish zenith in fundamental news earlier this week when a Russian PGM Mining CEO suggested palladium might be facing a world-wide deficit of 1,000,000 ounces. Furthermore, open interest has continued to liquidate which to us suggests that buyers are not stepping up on setbacks as usual and that could set the stage for March Palladium to fall back to consolidation low support down at $2,178.80. Given our patently bearish view toward palladium today, we suspect platinum will also be under pressure and a return to $954.30 could be an easy target.

Pushed into the gold market today, we favor a buy breaks strategy as we think speculators will try to push up prices ahead the close in anticipation of evidence of significant economic slowing news from China but also because of expectations for a noted Monday morning jump in the number of Chinese infections from the weekend. However, it could be a very narrow difference for gold traders between noted safe haven buying interest and moderate physical demand fear selling. Buying support in April gold today is seen at $1,565.80 with that level potentially tested through US payrolls. In the event US payrolls disappoint that could allow weekend virus speculation buying to gain control earlier in the day.”

Silver closed down $0.12 at $17.67. Interesting that this market has been quiet of late, but we are seeing a renewed interest at these levels.

Platinum closed up $1.90 at $966.60 and palladium closed down $27.00 at $2232.10. Palladium has, not surprisingly turned into a market in which we see almost all sellers. 

Our Patented Employee Survey – Gold’s Direction Next Week?

Of course, it’s not really patented but we do have some fun along the way. This is what the employees think: 7 believe gold will be higher next week and none think it will be lower and 2 think it will be unchanged.

Our Patented Customer Survey – Gold’s Direction Next Week?

Like the employees our customers were given three choices – up – down – unchanged. We limited the survey to a random sampling of 100 transactions – unscientific but worth considering because these people took action: 52 people thought the price of gold would increase next week 32 believe the price of gold will decrease next week and 16 think prices will remain the same.

Precious Metal Closes & Dollar Strength – Feb 3 – Feb 7

Gold - Defensive to Choppy

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