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Gold in a Holding Pattern?

Gold in a Holding Pattern?  

Commentary for Monday, March 12, 2018 ( – Gold closed down $3.00 at $1319.40 today – so it remains steady but on the choppy side. Last Monday gold closed at $1318.10 a low for the week with the high close being $1333.60. Most would describe this price action as being on the “soft” side of interesting. Keep in mind that the next FOMC meeting falls on the 20th and 21st of this month. That’s Monday and Tuesday of next week and the governors thoughts about interest rates will be made public that Wednesday after the markets close.

Just what the governors will have to say remains perplexing but traders expect them to be hawkish even though talk as late as last Friday indicated they might still delay. The CME Target Rate Probabilities shows an 86.0% chance of a small rate hike. This CME number can be all over the place depending on the economic news but the latest jobs numbers was smoking so I suspect they will do something to assuage the fear of getting behind the curve.

What is clear for now however is that interest rates have been artificially low for a decade and any changes the FOMC have in mind will be gradual in their own words – meaning this process of rising interest rates could take years if they want the real estate and stock markets to hold up.

In the meantime the price of gold holds relatively steady this past year – a choppy market yes but with a positive bias. Last March gold was trading at something above $1200.00 challenging $1300.00. It broke higher on two occasions above $1340.00 and twice tried $1360.00.

During this 12 month period there was geopolitical angst and tariff talk – both of which supported gold prices for a short time but quickly faded. Don’t discount either in the longer term if the White House is serious about tariffs or nuclear proliferation. The answers to both questions sound good in short sound bites but have no easy answers.

The price of gold this past year was capped by two conversations. The first was interest rates – when will the FOMC act and how enthusiastically? We are still dealing with that dilemma and I think everyone would be better off to realize that the FOMC will act gradually and move on.

The second conversation centers on physical demand. I have been banging on about both China and India for some time now – the theory being that they both are price shoppers. They like gold below $1300.00 and their interest wanes as the market takes a shot at $1400.00.

So I think the downside at present is not a big deal even with the threat of higher interest rates. Gold demand in the US is asleep but traders watch this market carefully and physical demand will pick up dramatically if gold trends lower.

The wild card then remains dollar strength. Neils Christensen (Kitco) had a nice conversation with Maxwell Gold (ETF Securities) and suggests that the US dollar may well be facing a structural bear market. He cites big spending and trillion dollar deficits at the core of the problem. And while the dollar is holding its ground because of probable interest rate hikes this trend will eventually fold its tent. The dollar will move lower, perhaps substantially lower and investors will turn back to gold for financial protection.

He concludes “Although Gold is bullish on precious metals in the long-term, he warned that the gold prices could struggle in the near-term. He added that he could see gold prices trading between $1.250 and $1.300 in the second quarter and then rallying in the third and fourth quarter. “Any dip below $1,300 is a very attractive entry point to build up a strategic allocation in gold,” he said. In his research, Gold noted that on average the U.S. dollar had lost more than 25% in a bear market, which has historically lasted about 5.5 years, meanwhile during those down years, commodities in general have risen more than 81%: U.S. equities have seen gains of more than 40%.”

This from Zaner (Chicago) – “Gold is a bit lower this morning, as the stock market is reacting positively to Friday’s jobs report. The economy is moving along well, but inflation remains elusive, which suggests that while the Fed may be inclined to boost rates, it may not be in much of a hurry to do so or to be very aggressive about it. This scenario seems neither bullish nor bearish to the precious metals, and it suggests we could see more sideways action until inflation data starts to heat up or is at least more consistent. The precious metals shook off early pressure to post modest gains on Friday. News of a possible meeting between President Trump and North Korean leader Kim Jong Un and a strong non-farm payrolls number in the US monthly jobs report provided a boost to global risk sentiment, which led to modest outflows from gold and silver early in the US session. However, a surprising downtick in average hourly earnings weakened the dollar as it took some of the urgency away from the Fed raising rates, and this helped the precious metals find their footing as the day progressed. The trade will be looking ahead to US CPI on Tuesday and especially US PPI on Wednesday for new evidence that inflation is taking hold, after the slowdown in wage inflation suggested otherwise. Over the weekend, cash gold prices firmed in India, led by active jeweler buying. However, it was also reported that India’s government-owned Metals and Minerals Trading Corporation is set to auction 151 kilograms of gold bars deposited under the nation’s gold monetization plan, and this would add supply to the market and could pressure spot prices. Australia’s largest gold producer halted operations at one of its mines after a dam wall collapsed. They are investigating the cause and impact of the collapse before they resume operations. There are reports that South African gold producers will likely reach a settlement within six weeks to a class-action lawsuit filed by miners over silicosis, a fatal lung disease.

The Commitments of Traders Futures and Options report as of March 6th for gold showed non-commercial traders were net long 193,337 contracts, an increase of 9,815 contracts on the week. Non-commercial and nonreportable traders combined held a net long position of 215,231 contracts, an increase of 10,365. Managed money traders were net buyers of 4,178 contracts. For silver, non-commercial traders were net long 4,876, an increase of 7,444 on the week, while non-commercial and nonreportable traders combined held a net long of 21,123 contracts, an increase of 6,759. Managed money traders were net buyers of 5,761. The buying trend is bullish.

PGM prices were lower overnight, giving up some of their gains from Friday. The latest Commitments of Traders report indicated that traditional trend-following funds (managed money traders) were net sellers over the previous week, perhaps on concerns that the proposed tariffs would hurt industrial demand. During the session on Friday, PGMs found decent support from stronger risk appetites in the wake of the jobs report. Strong job growth coupled with low wage inflation is a “goldilocks” situation for stocks and for business in general, and the PGM markets may have seen this as welcome news following the tariff talk and talk of four Fed rate hikes from earlier in the week. Platinum bulls may be encouraged by the market’s close back above some key retracement levels after all the bearish news regarding cutbacks on diesel usage in Europe. Also, news that a major South African platinum mining company might see a new wave of protests this week could give the market a bit of a boost.

The Commitments of Traders Futures and Options report as of March 6th for platinum showed non-commercial traders were net long 36,169 contracts, a decrease of 6,740 contracts on the week. Non-commercial and nonreportable traders combined held a net long of 42,918 contracts, a decrease of 5,703. Managed money traders were net sellers of 6,520 contracts last week. For palladium, non-commercial traders were net long 14,298, a decrease of 2,649, while non-commercial and nonreportable traders combined held a net long of 15,008 contracts, a decrease of 2,756. Managed money traders were net sellers of 2,467 last week. The selling on the part of the funds in both metals is bearish.”

Silver closed down $0.08 at $16.47.

Platinum closed down $1.30 at $961.40 and palladium closed down $19.20 at $971.40.

The Unscientific Activity Scale is a “2” for Monday. The CNI Activity Scale takes into consideration volume and the hedge book: (last Tuesday – 2) (last Wednesday – 2) (last Thursday – 3) (last Friday – 2). The scale (1 through 10) is a reliable way to understand our volume numbers. The Activity Scale is weighted and is not necessarily real time – meaning we could be busy and see a low number – or be slow and see a high number. This is true because of the way our computer runs what we call the “book”. Our “activity” is better understood from a wider point of view. If the numbers are increasing – it would indicate things are busier – decreasing numbers over a longer period would indicate volume is moving lower.

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