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Gold – Interest Rate/ Labor Market Mess

Gold – Interest Rate/ Labor Market Mess

Commentary for Friday, Sept 9, 2022 ( – Today gold closed up $8.20 at $1716.20 and silver closed up $0.33 at $18.66. Gold jumped higher in early trading ($1730.00) but quickly settled for modest gains on the day. The Dollar Index was on the erratic side with a full point swing in the first four hours of trading. I don’t think this is a “good” or “bad” story. But it does suggest volatility even after the Fed Chief assured the faithful yesterday that rising interest rates are the reality payment for stopping inflation. Before further damage to the economy becomes the reality. This looks like the old conundrum of “higher interest rates versus recession” is still with us. Which suggests that traders “heard” what Powell said yesterday but are not convinced of his veracity. Well, I’m convinced. Which leads to another complication. Higher interest rates and higher gold do not work well. Is it finally time for gold to break free from this worrisome relationship? A small test of this speculation will happen early next week as investors view the latest inflation numbers for August. Last Friday gold closed at $1709.80 / silver at $17.78 – on the week gold was up $6.40 and silver was up $0.88.

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On Monday the domestic markets (and us) were closed for Labor Day.

On Tuesday gold opened weak, drifted lower and eventually closed on daily lows. With virtually no aftermarket bargain hunting. This suggest that Friday’s gain was an anomaly, perhaps the result of a short-covering rally into a long weekend. Traders have again moved to their default position that the Fed would not waver on its interest rate policy. The dollar moved to fresh 20-year highs. Treasury yields climbed as Fed funds futures are pricing in a 75% chance of a 75-basis point hike at its September 20th and 21st policy meeting. Aggressive interest rate policy is also supported by an expected ECB rate hike of 75-basis points this week (Reuters).

Obviously, anything which might suggest less aggressive rate hikes would be bullish for the gold scenario, but this remains wishful thinking. That is the bad news, the good news is that we will have a decision by the FOMC in a couple of weeks. It is hard to imagine anything changing much in such a short time. So, I suspect gold will drift lower on the short term.

It is a good bet that by the time traders are sure of the FOMC changes gold will already reflect the shorter-term pricing model. And this fixation over higher interest rates will reinvent itself anticipating the next Fed rate hike.

What makes this call difficult is that the world is also judging gold’s value by its own parameters, including inflation, safe haven buying, and bargain hunting relative to individual currencies. This confused economic picture, however, should help support the medium to longer term view of gold pricing. If you are looking for an “outside the box” view, consider this minority opinion. As more is known about central bank interest rate intentions, world uncertainty should decrease. And relative gold pricing may become less volatile. Perhaps even boring. If such a thing is possible in the modern world of uber finance.

On the day gold closed down $9.40 at $1700.00 and silver closed up $0.02 at $17.80.

Zaner (Chicago) – “The dollar is higher this morning as worries about recession in Europe (driven by an energy crisis) and expectations for higher interest rates US lend support, and this has pulled gold off its earlier highs. The euro fell to a 20-year low overnight after Russia cut off natural gas supply to Germany. Gold did find support in India as the worsening energy crisis in Europe appeared to spark safe-haven demand, but that strength has not held, and the market is back near unchanged. We maintain that Friday’s rally in gold, silver, platinum, and palladium were driven by technical short covering, which puts last week’s lows in doubt. The dollar has a macroeconomic edge over the other currencies, and we think it would be premature to expect a sustained slide. Other major economies (Europe and UK in particular) are not likely to raise rates as aggressively as the US has, as they face significant headwinds because of high energy costs. ETFs cut gold holdings by 102,684 ounces on Friday and silver holdings by 649,264 ounces. Gold holdings are up 1.8% on the year and silver is down 13%. Friday’s Commitments of Traders report showed managed money traders were net sellers of 9,600 contracts of gold for the week ending August 30, reducing their net long to 20,726. In silver, these traders were net sellers of 5,425 contracts, increasing their net short to 21,059. Funds are almost flat in gold and approaching oversold in silver, but the selling trend is short-term negative. ETF liquidation is also negative. We do not hold out for sustained upside action today in gold or silver.”

On Wednesday gold drifted lower on the open but caught a bid at $1700.00 and surprisingly pushed to highs on the day ($1712.00). The Dollar Index came off daily highs (110.75) and moved a half point lower. The reasoning for the small bounce is difficult to pinpoint. But clearly gold is finding support from perhaps a combination of short covering and bargain hunting. China is resorting to stimulus to help a sagging economy, and this may also help support higher prices. (Reuters) – “China’s exports and imports lost momentum in August with growth significantly missing forecasts as surging inflation crippled overseas demand and fresh COVID curbs and heatwaves disrupted output, reviving downside risks for the shaky economy.”

Gold sentiment remains bearish as traders brace for higher interest rates. And watching crude oil prices fall from $95.00 to $82.00 a barrel these past few weeks does not encourage the bullish scenario. Rajan Dhall (Kitco) comments on the monthly picture. Gold has moved back in recent weeks and looks to be testing an important zone. The price is currently very close to the consolidation low. If this low breaks, it would make a lower high lower low formation and potentially become the start of a new longer-term trend down. This is a monthly view so on the lower timeframes there will be waves that need to confirm the move but the recent weakness in the yellow metal cannot be ignored. Most central bankers have confirmed they are willing to do what it takes to improve the high inflation rates. This means fixed income yields could rise further causing more havoc to the precious metals complex. On a more technical note, the green support line confluences with a 50% Fibonacci retracement. This level was also used as a consolidation support back in 2012 and might be useful again. All of this is based on if the current consolidation low of $1676/oz breaking again and the price closing below the area. The month of September looks pivotal for the safe haven asset class.”

On the day gold closed up $14.90 at $1715.30 and silver closed up $0.34 at $18.14.

On Thursday gold remained defensive as Chief Powell had a question-and-answer session at the Cato Institute’s annual monetary policy. This was the inside “peak” that everyone was looking for and Jerome did not disappoint. He reiterated the Fed is independent of outside pressure and will follow the Congressional mandate to control inflation. He was also specific in his use of the word “control”. It does not mean manipulation; this is serious business and he suggested that all his cohorts are on the same page. He said now is the time to act decisively. Waiting will raise the overall cost to the American people and create more long-term damage to the economy.

I think everyone now believes the Fed will raise interest rates ¾ of a point in a few weeks and keep that pressure on until it sees a meaningful drop in the inflation numbers. The ECB raised interest rates ¾ of a point today – no problem. This kind of unilateral action diminishes the talk of a dovish “pivot” to avoid recession. Today was not uplifting for the bulls. But you should give the Fed credit for being consistent moving forward. Which avoids earlier confusion.

I’m a little bit surprised at the hawkishness of Powell’s comments in that he did not give the FOMC much leeway early into an inflation battle that could take a few years to accomplish.

I’m really surprised at gold’s initial reaction. Yes, it’s lower but not falling out of bed. Traders bought the dip at $1705.00, and the market remained at lows moving sideways into the close. With the Dollar Index bouncing around 110.00 I would have expected a larger drop in prices.

On the day gold closed down $7.30 at $1708.00 and silver closed up $0.19 at $18.33.

Zaner (Chicago) – “The gold market appears to be on a short covering rally from an oversold condition, as traders are on both sides of the fence regarding how far the Fed will have to tighten. The dollar has set back after another move to new highs yesterday and another 20-year high, and this is supporting gold. While the trade seems to be expecting a 75 basis-point hike this month, some are of the opinion that hikes will not continue at that pace into the new year. When the Fed is aggressive, it is hard to be bullish gold, but the threat of recession and/or persistent inflation makes it an attractive safe haven. Fed Chair Powell speaks today, and he is expected to continue with the hawkish talk. In what may have been a preview, Fed Vice Chair Brainard said yesterday that monetary policy would “need to be restrictive for quite some time,” indicating they are still not convinced that the worst of inflation is over. October gold held above last week’s low on its early break yesterday and recovered to close higher on the day. The market had gotten oversold, presenting a bargain-hunting opportunity. It could draw some fundamental support with the approach of wedding season in India. Gold could rally another $45 and still be in a downtrend. Like gold, silver has gotten oversold and vulnerable to a rally. ETF holdings saw a slight decline of 42,202 ounces in gold (less than 0.1%) yesterday and slight increase of 347,068 ounces of silver (also less than 0.1%). Gold holdings have declined for eight straight sessions.”

On Friday gold finished essentially choppy. But did get off to a reasonable start as the confusion factor rises into another uncertain weekend. Rising interest rates clobbered the bullish gold market in 1980 and obviously still holds mighty sway in today’s trade. I appreciate that today’s trade is happening in a much different environment than those early days. But interest rates are still a primary key to price direction. And want to suggest that even professional economists are not on the same page here, so caution is the best approach.

Yesterday’s Reuters comments should have created a serious discussion but The Band Played On. “The U.S. unemployment rate may need to reach as high as 7.5%, double its current level, to end the country’s outbreak of high inflation, according to new estimates from a team of researchers including two staff economists from the International Monetary Fund.”

On the day gold closed up $8.20 at $1716.20 and silver closed up $0.33 at $18.66.

Platinum closed up $10.80 at $876.00 and palladium closed up $30.80 at $2162.70.

Zaner (Chicago) – “Uncertainty has taken a big jump over the last 24-48 hours, and gold seems to be responding. The passing of Queen Elizabeth, a new UK Prime Minister, and an expanding energy crisis in Europe that has been described as the worst crisis since World War II appear to have sparked safe haven buying in gold. It also helps gold’s case that the dollar gapped lower overnight to its lowest level since August 31. The selloff was spurred on by the ECB raising its key interest rate by 75 basis points, its largest increase ever. This sent the euro sharply higher. ECB members did not rule out another large increase next month. Gold’s upside is limited by a stalwart Fed that is showing no signs of backing off from its hawkish stance. Chair Powell said on Thursday that the Fed remains strongly committed to bringing inflation down. Fed Funds futures on Thursday were pricing an 85% chance of a 75 basis-point hike in September. Initial jobless claims fell to their lowest level since May last week, which is another indication of the strength of the labor market and which gives the Fed comfort in raising rates. From a technical perspective, October gold pushed through a steep resistance line overnight, which puts it on course for a more significant correction of its oversold condition. Should the market fail to do so, the thrice-tested $1,700 level would be a key support area. ETFs reduced gold holdings for the ninth straight session on Thursday, with a decline of 103,749 ounces or 0.1%. Gold holdings are up 1.6% year to date. They also reduced silver holdings by 1.277 million ounces, a 0.2% decline. Silver holdings are down 13% year to date.”

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