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Gold – Inflation Interpretation?

Gold – Inflation Interpretation?

Commentary for Friday, May 14, 2021 ( – Gold closed up $14.10 today at $1837.90 and silver also closed higher – up $0.31 at $27.35. Gold and silver trading this week seemed a bit confused – tossed about by higher inflation rates being denied by the Fed along with their assurance that interest rates would not change anytime soon. I am in the minority but probably worry too much about inflation. CNBC notes this morning that treasury yields fell after weaker retail sales missed – so the broader financial market does not seem “worried” and for the most part by the Fed explanation that “inflation” today is what CNBC commentor Mike Gallagher calls “perhaps a little bit misleading”. Last Friday gold closed at $1831.10 and silver at $27.46 so on the week gold gained $6.80 and silver gained $0.11.

The good news is that delivery on 2021 US Gold and Silver Eagles is getting better (still not “normal” but improving). And we are finally receiving early .9999 fine silver round orders. The bad news is that “any new orders” are still 4 to 8 weeks coming from the manufacturer. My guess, however, is that delays will soon at least shorten. 

Should you decide to use our Delayed Delivery Program please talk with your service rep and understand how this program works. It is handy if you want to lock in the price “now” and insist on new product – but is not for everyone. Just like us – you must pay upfront to “lock in” prices and you can’t “change” your mind. So, unless God has blessed you with patience, please ask your rep for other options and thank you for your understanding.

Gold on Monday pushed higher on the open ($1845.00) before profit taking settled the trade as the Dollar Index reached a 2 ½ month low. These firm prices are also the result of Friday’s continued momentum as the inflation talk heats up between the public and the FOMC. As gold’s technical picture continues to improve the chart watchers expect even higher prices.

The disappointing US Jobs Report for April is given credit for today’s dollar weakness. It suggests that our pandemic and economic recovery may not be as strong as predicted and so interest rates will remain low and supportive of gold prices.

Economic pessimism is not new here folks – some asked months ago why the Fed continues to buy $120 billion in Treasury debt monthly if the anticipated recovery is in the bag.

I think most dealers are a bit too optimistic this early in the game, likely prompted by the lack of physical product. And it is true that some bullion products are simply not currently available from manufacturers. But remember there are equally good bullion replacements.

On the shorter-term gold pricing between $1850.00 and $1900.00 presents another challenge to this developing rally. And I do not expect overhead resistance to melt away – it is never that easy in the precious metals business. Especially with DOW competition setting a record high today. Gold is up $100.00 this past month so profit taking should present turbulence.

Sustained numbers above $1850.00 would require a breakdown in the dollar which is already approaching a yearly low – so not likely. To sustain higher numbers ETF and hedge fund numbers must join the party. On the day gold closed up a modest $6.40 at $1837.50 and silver closed up a sleepy $0.02 at $27.48. 

Gold opening Tuesday with a positive bias but experienced the profit taking ($1840.00) I talked about Monday. The weaker dollar softened the price drop in gold and traders bought the weakness as it closed almost unchanged. I believe this positive price action is because “inflation worry” will not disappear as the Fed continues to pour money into this closed system.

This bullish sentiment however is still presented with challenges. Gold’s impressive $100.00 gain this past month is a natural for profit taking creating choppy trading weeks. And the tough overhead resistance in place since last September is worrisome. Still sentiment continues to improve. But it is not all blue sky, the case for an oversold market is in the rear-view mirror.

Reuters points out that Wall Street’s main indexes fell today on inflation fears. The notion that the Fed will tighten sooner than later as inflation fear grows has been floating around now for months. But I do not think this holds much water because pandemic concerns will override inflation fears likely into the next year.

Especially if our economic bounce back disappoints. But inflation red ink in stocks might just translate into lower gold prices which is counterintuitive but historically accurate. Just because inflation numbers begin to creep higher may not automatically translate into higher gold. You could easily see sell offs in gold to raise fast cash for margined stocks.

And the inflation scenario is subject to interpretation. The Colonial Pipeline cyber-attack is a good example. This mess began as a ransomware problem – Colonial was careless. But it turns out the shutdown created higher gas prices and shortages despite this reasonable explanation. Yet these higher prices will surely suggest to some that inflation is right around the corner.

This from Zaner – “Overnight Chinese inflation data was mixed with factory prices hot and consumer prices contracting on a month over month basis. Therefore, gold and silver missed out on an opportunity to foment inflationary conditions and provide consistent buying to precious metals. However, the inflation readings in China (like the US payroll data last week) allow for the Chinese central bank to leave rates lower for longer. On the other hand, the Chinese government has from time to time attempted to control prices and the current situation might not be any different. Yesterday gold ETF holdings increased by 45,674 ounces while silver holdings declined by 1.3 million ounces.”

For now, I think it is best to look for turbulence in stocks and the metals because money will remain historically cheap for years. The Fed’s unabridged largess in the trillions of dollars has created what academics might one day call “The Great Pandemic Speculation”. Unending cheap money which eventually led to excess, poor judgment, and crazy leveraged choices which paraded around for a long time under the guise of respectable investments.

The good news is that both gold and silver remain undervalued relative to other already inflated asset choices. And best of all people who would not normally consider the metals are in the early stages of paying attention. On the day gold closed down $1.60 at $1835.90 and silver closed up $0.18 at $27.66.       

The gold pricing for today Wednesday is counterintuitive – but logical when seen from the “what will the Fed do now” standpoint. Gold opened higher – pushing towards $1850.00 waiting for the latest US consumer price data. The expected forecast according to Reuters was 3.6% but the actual number came in even hotter at 4.2%. I would have assumed much lower numbers but even the higher anomaly should have been anticipated. The Fed has been holding everyone’s hand for some time how claiming rising inflation will be “transitory”. This number however was the largest increase since 2008 and it rattled both Wall Street and the metals.

If this rise were even modest gold would have held early gains, but it was large enough (transitory or not) to once again suggest that the Fed will be forced to raise interest rates. This pushed the Dollar Index higher and took the wind out of the bullish gold price scenario.

It should be clear that the conversation about higher interest rates will not soon go away. But I think – at this stage at least – it is more academic than practical. The Fed has many ways of “tapping the brakes” on this expansion, settling the “fixation” on short term yields and talking most down from this imagined ledge. The “bigger picture” always prevails. The FOMC are masters at what they do, or the dollar would still not be the world currency of choice. There is nothing wrong with the current system as it is just stressing – not collapsing.

Anyone can argue that current US financial policy will eventually deliver damaging inflation and higher gold prices. But I have always believed that real physical gold and silver in your hand are financial essentials in a modern world – inflation or not.

Creating large sums of fiat currency does not necessarily led to immediate disaster. Japan is the poster child of this modern reality and has been using this corrupted model for decades. The result, a mountain of debt and zero growth. Still, you could argue is not a fiat currency problem, but a dilemma faced by many industrial countries as birth rates slow and the population ages.

Twenty years ago (2002) the price of gold was $300.00. During that time gold prices moved to $1800.00 in 2010 and $2000.00 in 2020. Granted the price ride was volatile and likely not for everyone but given our current slate of troubles do you think the price of gold will be higher or lower 20 years from now? This reasonable argument becomes more powerful if you appreciate that both gold and silver bullion have been real money for thousands of years. They both always represent a “stand alone” insurance policy in the unlikely case that I am wrong about how smart the Fed is at controlling its own future, and you are called upon to do that yourself. Gold on the day closed down $13.30 at $1822.60 and silver closed down $0.43 at $27.23. 

Gold drifted lower on the open Thursday but bounced off the daily lows ($1810.00) and pushed towards $1825.00 as the Dollar Index flattened out and Treasury yields slowed according to Reuters. “Dips in gold remain a buying opportunity. We are in a fundamentally strong underlying condition of going through recovery in the economy along with a very low interest rate environment that creates inflationary pressures in the market,” said David Meger, director of metals trading at High Ridge Futures. “It would not be surprising to see this (gold) market pull back and consolidate a bit before the next wave to the upside.”

It is interesting that gold has not benefited much from inflation talk. Instead, old prices are almost always tied in one way or the other to dollar strength. The battle now raging between Israel and Hamas is the worst seen in this region in decades and surprisingly gold is napping.

If you consider that gold’s recent highs were created over the uncertainty and fear of a newly spreading pandemic about a year ago. And prices have been generally trending lower since the vaccine rollout, meaning the fear factor is moving lower.

The forces that created this latest $1850.00 updraft are related to the pandemic, but the price drivers are focused on a different dynamic. The massive liquidity created by the central banks used to keep world economies afloat and limit economic and human damage should create another form of fear factor – inflation. For now, however, inflation is held in check by just the threat of rising interest rates which creates a stronger dollar.

The consistent thing which creates gold and silver buzz on the short term is the physical shortage problem which remains a great conspiracy source – real or imagined.  I do not see much price downside at current levels but for gold and silver to make new highs this standoff needs to be resolved. On the day gold closed up $1.20 at $1823.80 and silver down $0.19 at $27.04.

Gold pushed higher on Friday from the open as US retail sales disappoint and the Dollar Index lost a half point (90.34). The Fed downplayed an imminent rise in interest rates despite a sharp rise in inflation according to Reuters.

This from Zaner (Chicago) – “The action in the gold and silver markets continues to be confusing as the markets failed earlier in the week in the wake of the hottest monthly inflation reading in decades. On the other hand, gold and silver have consistently tracked higher in the face of softening US rates and weakness in the dollar. Surprisingly, both gold and silver ETF holdings increased yesterday but silver ETF holdings will probably finish the week with a net outflow. We suspect that the precious metals markets (and almost all the markets) are garnering lift from a chorus of optimistic Federal Reserve comments yesterday which included assurances that the Fed would not preempt inflation and instead focus on jobs. In fact, several Fed members this week have reiterated the Fed’s belief that current inflation will be transitory. Apparently, the gold market is unfazed by reports overnight that yet another key auspicious period for gold buying in India has been foiled by lockdown. For now, the bear camp is left with the potential that surging infections in India could “breakout of India” and spark another wave of infections throughout Southeast Asia. In the end, despite all the negative demand news flowing from India, a jump in trading volume on this week’s dip in prices and a lack of definitive interest in gold and silver ETFs, the markets look to finish the week on an up note. However, the weakness in the dollar is not significant and interest rates have merely ticked down slightly from 30-day highs and US retail sales could be a very key pivot point for prices early this morning.” On the day gold closed up $14.10 at $1837.90 and silver closed up $0.31 at $27.35.   

Silver closed today up $0.31 at $27.35. With more rumors about big price jumps just around the corner from credible dealers. Don’t you just love the coin business – or not.                                 

Platinum closed up $16.20 at $1220.80 and palladium closed up $30.00 at $2891.60.                   

My Brothers and Sisters, we always thank you for your business and fellowship. If you have unusual circumstances, need cash or are looking for a special visit – talk to Harry. Many on our staff have now received the vaccine as we continue to enforce rigid safety standards between people and product. Be careful, this virus remains a danger. At the same time trust that God will soon get us back to normal. Richard Schwary

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