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Gold – Fed Equivocation

Gold – Fed Equivocation

Commentary for Friday, Oct 28, 2022 ( – Today gold closed down $21.10 at $1639.50 and silver closed down $0.33 at $19.15. Gold finished the week trending lower as the dollar gained strength and traders once again focus on near term, likely hawkish Fed policy. The early in the week speculation of a Fed interest rate “pivot” has disappeared in the heat of rising US inflation numbers. This “back and forth” trading sentiment is typical of a market which lacks conviction because the deep thinkers in Washington can’t seem to get everyone on the same page at the same time. An informed Reuters source this morning even claimed that a recession would support the price of gold. What is supporting the price of gold are the current discounted prices coupled with safe haven demand in a world threatening even more confusion. Current demand is patiently underpinned by China and India between $1600.00 and $1650.00 because they sense value at these numbers. Ignore the emotional noise until the Fed does something tangible with the existing interest rate structure. Last Friday gold closed at $1651.00 / silver at $19.04 – on the week gold was down by $11.50 and silver was up $0.11.

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On Monday gold was quiet in the overnight Hong Kong and London markets. And the domestic New York trade was typically choppy, confined to both sides of $1650.00 and finished the day almost unchanged. This was expected as the strong Dollar Index remains steady ($112.00).

The lack of follow through from Friday’s jump in prices will disappoint the bulls. But it also makes sense when you consider that higher prices Friday were created over the “possibility” of a Fed pivot. This new insight was created last week by two Fed governors. But most believe the majority of the FOMC faithful are still very hawkish. They favor higher interest rates until there is something measurable that would suggest inflation is beginning to cool.

At this point patience will be required to see what the FOMC does between now and next year. And analysts are all over the place. Reuters – “Markets have priced in a 75-basis-point interest rate hike by the Fed in November but are now scaling back bets for a similar hike in December after reports that Fed officials will likely debate the size of future increases. A survey showed U.S. business activity contracted for a fourth straight month in October, the latest evidence of an economy softening in the face of high inflation and rising interest rates. “Gold could potentially rally to $2,250 per ounce in case of a sizable U.S. recession and fall to $1,500 per ounce in an ultra-hawkish Fed scenario,” Goldman Sachs.”

I have become suspicious of the much used “pricing in” concept, where there was a time when I used this notion regularly. It remains to be seen if the markets have “priced in anything” during this confusion. Ditto about “scaling back” interest rates. Not surprisingly I’m in accord with the latest Goldman Sachs evaluation – this circus could easily push gold to $2250.00 if traders turned dovish on interest rates. Or gold could fall to $1500.00 with a hard US landing. Not because extreme interest in gold and silver bullion is over but because during a recession both assets are easily sold to raise cash. Finally, keep in mind that the more isolated Russia becomes the more precarious this stand-off between Russia and the US. Notwithstanding any unilateral support from other parts of the world. President Biden owns the fallout from this mess as we move backwards towards a different kind of cold war. But let’s at least keep talking to each other in a political sense as the world becomes a more dangerous place.

On the day gold closed down $2.30 at $1648.70 and silver closed up $0.13 at $19.17.

Zaner (Chicago) – “Initial weakness in the dollar overnight translated into a temporary rally in gold to start the trading week. Given the one-way street to unending jumbo US rate hikes, it is not surprising that gold reversed direction aggressively at the end of last week in the wake of suggestions that November’s 75-basis point US rate hike might open the Fed to a slight moderation of the pace of increases in the December meeting. On the other hand, the Fed last week made it very clear that softening in the economy will not deter their battle against inflation, but that gold bearish theme was countervailed by words of caution from a Fed member indicating the Fed could not “overdo it”. In yet another inflation tempering US official commentary, the US Treasury Secretary indicated that inflation was not “embedded” in the US economic structure. Unfortunately for the bull camp in treasuries, equities and physical commodities last week saw historical inflation readings from the UK and Europe. While we have mentioned it several times already German producer prices registered a year-over-year jump of 45.8% last week in a reading that unnerved investment in European instruments and that in turn provides the US dollar with ongoing strength. Over the weekend reports from India suggested that pre-festival gold buying has been unremarkable despite gold prices last week reaching the lowest level since the beginning of the pandemic! With the Indian rupee at record lows, Indian imports of gold might moderate sharply if it were not for the low flat price. Even though the December gold contract into the close Friday was near the level where the last COT positioning report was measured, into the low last week the market was $36 lower which likely put the net spec and fund long down to the lowest levels since the middle of 2019. The Commitments of Traders report for the week ending October 18th showed Gold Managed Money traders net sold 21,923 contracts which moved them from a net long to a net short position of 20,633 contracts. Non-Commercial & Non-Reportable traders reduced their net long position by 18,006 contracts to a net long 83,353 contracts. Last week gold ETF holdings declined by 779,853 ounces and are now 2.4% lower year-to-date. Given the silver market’s capacity to stand up to weakness in gold and significant strength in the dollar last week and in turn respect the $18.00 level over 6 trading sessions, the range up move on Friday could signal silver’s newfound bullish capacity especially if extreme hawkish Fed views are tempered further. It should be noted that the net spec and fund long in silver remains extremely low compared to the last 3 years but is not as liquidated as the gold spec positioning. Silver positioning in the Commitments of Traders for the week ending October 18th showed Managed Money traders went from a net long to a net short position of 7,599 contracts after net selling 8,722 contracts. Non-Commercial & Non-Reportable traders were net long 8,679 contracts after decreasing their long position by 7,432 contracts. Last week silver ETF holdings increased by 517,650 ounces but are 13% lower year-to-date. In the end, we are not impressed with bullish fundamental prospects in gold and silver.”

On Tuesday gold was supported as the dollar weakened. The Dollar Index moved lower by a full point in the morning as consumer confidence flagged over worries about inflation and recession which may lead to a less aggressive Fed. This in turn introduced a mild short covering rally.

If consumers see a cloudy inflation future, this fear is not reflected in the Dow Jones Industrial Average. The DOW this past month looks technically sound, moving from 29,000 towards 32,000. Expected higher interest rates did not stop this forward march which suggests stock investors believe this FOMC landing will be soft enough. It is surprising that there can be such a wide expectation divergence using the same Fed guidance.

Neils Christensen (Kitco) – Gold prices holding at session highs as U.S. consumer confidence drops to 102.5 – The gold market is holding at session highs as rising inflation continues to take its toll on U.S. consumer confidence. The Conference Board said on Tuesday its consumer confidence index fell to a reading of 102.5 this month, down from September’s reading at 107.8. The data significantly missed expectations as economists were looking for a reading of around 105.9. “Notably, concerns about inflation – which had been receding since July – picked up again, with both gas and food prices serving as main drivers. Vacation intentions cooled; however, intentions to purchase homes, automobiles, and big-ticket appliances all rose. Looking ahead, inflationary pressures will continue to pose strong headwinds to consumer confidence and spending, which could result in a challenging holiday season for retailers,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board. Looking at the components of the report, The Present Situation Index dropped sharply to 138.9, down from September’s reading at 150.2. At the same time the Expectations Index dropped to 78.1, down from last month’s level at 79.5. “The Present Situation Index fell sharply, suggesting economic growth slowed to start Q4. Consumers’ expectations regarding the short-term outlook remained dismal,” Franco said. “The Expectations Index is still lingering below a reading of 80—a level associated with recession—suggesting recession risks appear to be rising.”

I would be less concerned about our financial system during this “unwinding” if everyone took the process more seriously. Yesterday’s comments by US Treasury Secretary Janet Yellen should have been recognized as a red flag and not ignored. Leverage in the private sector, especially as it relates to unregulated banking derivatives could easily be the epicenter of the next financial disaster. “We are also attentive to the possibility that higher market volatility could expose vulnerabilities in nonbank financial intermediation,” the Treasury chief said. “Regulators have been working together to better monitor leverage in private funds and develop policies to reduce the first-mover advantage that could lead to investor runs in money market funds and open-end bond funds.” As for Treasuries, Yellen’s comments marked the second time this month that she acknowledged concerns over the functioning of the $23.7 trillion market.

On the day gold closed up $4.10 at $1652.80 and silver closed up $0.17 at $19.34.

On Wednesday gold initially rose to two-week highs ($1675.00) but traders sold the rally in usual fashion and on the day our shiny friend only posted modest gains. The day was driven by a weaker dollar.US bond yields slipped on expectations that the Federal Reserve would temper aggressive rate-hikes after December (Reuters). The Dollar Index has lost more than 4 full points since Friday’s recent high and is now trading below 110.00. This significant weakness makes gold more attractive to foreign buyers. If Treasury yields continue to slip over softer economic data it bolsters hopes that inflation will moderate, and the Fed will be less aggressive.

A few things to consider. First the dollar is likely oversold so expect some sort of upward correction which could discourage new gold bulls. Many still believe that the Fed will not deviate from its 0.75 percent rate hike by year end. It may reconsider further immediate rate hikes next year or perhaps slow down the process. And look for confirmation that inflation is not as aggressive as most believed just a month ago.

The idea that the Fed would “pivot” was ignored just a few months ago. But this morning this very dovish notion has reinvented itself. The Bank of Canada surprised the market and other central banks by raising interest rates less than expected.

Paper speculators in the gold futures market have typically sold this kind of rally. Not a big deal if bullish sentiment improves but this rising positive sentiment could easily collapse if the dollar rebounds significantly. ETF outflows in the metals are discouraging but are offset by record gold demand during Diwali – the Hindu festival of light that celebrates good luck and prosperity.

On the day gold closed up $11.20 at $1664.00 and silver closed up $0.14 at $19.48.

On Thursday gold was choppy to mildly weaker in the New York cash market as the Dollar Index bounced off yesterday’s oversold lows. The European Central Bank raised interest rates the expected 0.75 of a point. ECB President Christine Lagarde remains an inflation hawk and informed analysts suggest even higher rates will be necessary to stop rising inflation within the EU. This discourages a rate pivot. Even though the European economic slowdown continues.

The US 3rd quarter economic rebound could embolden the FOMC relative to future rate hikes which would be a minus for the still fledging rise in the price of gold and silver. But the obvious slowdown in consumer spending suggests the public remains cautious.

Reuters – “However, “the (Fed’s) November meeting is already expected to deliver 75 basis-point, and December likely to do likewise,” StoneX analyst Rhona O’Connell said, adding, “this talk of an early pivot is premature.” A majority of economists in the Oct. 17-24 Reuters poll forecast another 50-basis point hike in December. U.S. rate hikes increase the opportunity cost of holding zero-yielding bullion.”

The results of the Reuters poll are bullish for the metals if the academics are right and would likely override the higher interest rate consideration. Rhona O’Connell’s “premature” comment about a pivot remains central to the argument raging between the bulls and bears.

The academic poll carries big dovish weight, but inflation is out of the bottle and the Fed is faced with the problematic decision of fighting now or fighting later. I suppose that Powell is still looking for signs that inflation is slowing down and therefore the FOMC could get away with a half point hike. But some economists claim that inflation is not slowing down and will increase through next year. Others point out that if you look at the wider 10-year picture frame inflation will be around 2.5% which is Fed friendly. But these stakes are very high. If the Fed fumbles the ball Wall Street and the nation will pay the price. And the public will hold the Democrats responsible in coming elections. President Joe is already worried and bringing back former President Obama to head off losing the narrow edge the Dems hold in the House.

On the day gold closed down $3.30 at $1660.70 and silver closed unchanged at $19.48.

On Friday gold traded lower in the overnight Hong Kong and London markets and continued weak in the domestic New York trade. This is the result of the likely event I mentioned earlier in the week, namely the dollar weakness turned into an oversold market. The Dollar Index bounced off Thursday’s weekly lows (109.00) moving back towards a kind of weekly middle ground around 111.00. This makes sense because traders are not sure what the Fed has in mind for the short to medium time frame. Reuters claims that traders have now refocused on the impending rate hike next week. Bets for rising rates overall have put gold on course for a seventh straight monthly fall. “However, with the passing of time, recession fear is getting stronger and that could probably give a much-needed support to gold prices, and limit the downside,” Bharti added. Helping drive some of gold’s gains this week, the Fed was seen slowing its aggressive rate-hike pace in December, amid some signs of a U.S. economic slowdown. But Jigar Trivedi, a senior analyst at Mumbai-based Reliance Securities, said the outlook for gold still appears bearish with investment demand still weak and retail demand also not aggressive. “Gold should trade in a range of $1,640-$1,660 till there is an outcome from the Fed,” Trivedi added.

On the day gold closed down $21.10 at $1639.60 and silver closed down $0.33 at $19.15.

Platinum closed down $29.00 at $958.40 and palladium closed down $33.80 at $1894.60.

Zaner (Chicago) – “With a broad-based risk off environment flowing from equities and commodities, a pulse up in the dollar and significant outflows from gold and silver ETF holdings yesterday (-120,453 ounces in gold, -2.1 million ounces in silver) the bias in gold and silver is clearly pointing down. With the gold market yesterday failing to post a higher high for the move in the wake of a fresh downside breakout in the dollar and a downside breakout in treasury yields, the market may have made a temporary top. On the other hand, gold and silver price action could find fresh direction this morning following the Fed’s favorite inflation gauge of personal consumption expenditures which are projected to gain 0.5% (an increase of 0.2% from the prior month). However, would be buyers of gold and silver were likely discouraged yesterday by a jumbo ECB rate hike and were subsequently discouraged following a noted recovery bounce in the dollar. We also see Chinese gold demand prospects deteriorating with this week’s additional lockdown orders. In fact, soft 2022 Chinese gold demand has already been confirmed with a report yesterday that Chinese January through September gold consumption fell by 4.36% over comparative 2021 levels. From a short-term technical perspective, the high this week in December gold was posted on a minimal increase in trading volume, indicating prices above $1,667 are viewed by some as expensive. Given the negative outside market influences this morning and the presence of a key US inflation report, support in December gold falls to $1641.20 and traders should see the PCE report reactions set the tone of the session. In other words, the theme of a December moderation of Fed hawkishness could be tested this morning.”

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