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Gold – Interest Rate Uncertainty

Gold – Interest Rate Uncertainty

Commentary for Friday, January 20, 2023 ( – Today gold closed up $4.30 at $1926.40 and silver closed up $0.08 at $23.83. Gold dipped in price on the New York open, recovered and settled, holding a tight $9.00 spread on the day. A typically choppy market at the end of a short trading week. Supported by a reasonable technical picture and minor safe haven buying. This week’s gold trade brings to mind a modified Shakespeare quote (Macbeth). Pricing, potentially full of sound and fury, signifying nothing. Gold was down two days and up two days, finishing the week relatively unchanged. Trading sentiment moved from bearish to bullish to neutral. Still, gold is holding above the psychologically important $1900.00 level, which is a plus for the bulls. But traders continue to ponder FOMC intent so gold’s pricing fate will ultimately be reflected in future interest rate decisions. Last Friday gold closed at $1919.40 / silver at $24.23 – on the week gold was higher by $7.00 and silver was off $0.40.

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On Monday – was closed for Martin Luther King Jr. Day. Domestic commodity markets, post offices and banks were also closed for this Federal holiday. 

On Tuesday gold saw mild profit taking after reaching 8-month highs. This less bullish sentiment was encouraged as the Dollar Index seems to have settled – channeling between 102.00 and 102.5 since last Friday. Traders have priced in a one quarter point rate hike in February which is dovish enough to supply some bullish sentiment. But as usual I believe conviction on either side of this trade is thin. Any suggestion the Fed is turning more hawkish will likely send gold lower. The professional trade has already adopted a “wait and see” attitude relative to the FOMC. Which leaves the door wide open to sudden changes in trading sentiment.

The Basics: In the past month gold has moved up $100.00+ because traders are expecting a change in Fed policy due to the speculation that inflation is slowing. While this does encourage the bulls it also suggests further profit taking might be in order. I would also note that these elevated gold prices have traditionally cooled Asian demand. Finally, the New York paper trade sold today’s rally in gold at $1916.00, hardly a bullish endorsement.

MarketWatch (Myra Saefong) – Gold prices traded lower on Tuesday as the latest rally took a breather after settling at the highest levels since April at the end of last week. Gold has led a rally in precious metals as a weaker U.S. dollar has given prices a boost, while China’s economic reopening after lifting COVID restrictions has spurred hopes for rising demand. The ICE U.S. Dollar Index DXY, 0.10% was down 0.2% at 101.97 in Tuesday dealings, and trades around 1.5% lower month to date. “Among the precious metals, gold stands out for having risen by more than 5% to reach its highest level since the end of April 2022. The other precious metals are lagging behind, however,” said a team of precious metals analysts at Commerzbank in a Tuesday note. The Commerzbank analysts cautioned against betting that the rally in gold will “simply continue,” arguing that there’s still a “discrepancy” between the market’s interest-rate expectations and the Federal Reserve’s projections and messaging, which could make gold vulnerable to a pullback. “Nonetheless, we would warn against assuming that the price upswing will simply continue. There is still a considerable discrepancy between the interest rate path anticipated by the market and that indicated by the Fed,” they said. “If the market changes its view and moves more into line with the Fed, the gold price risks facing serious setback potential.” For now, Rhona O’Connell, head of market analysis, EMEA & Asia, at StoneX, believes the gold market is “clearly overbought and ready for a correction, but underlying sentiment remains friendly.” Whether gold has “fully priced in a slowdown in the Fed’s rate cycle is debatable, but the uncertain economic environment in Europe and the risk to emerging markets of a too strong dollar and high rates are all supportive for gold, as is the geopolitical climate,” she said in a daily note. Silver is likely to continue to ride on gold’s coattails, having paused for a much-needed breath.”

On the day gold closed down $11.20 at $1907.20 and silver was down $0.29 at $23.94.

Zaner (Chicago) – “With the gold and silver markets overbought with upside extensions forged to start today, it appears that the dollar has prompted a reversal and perhaps a measure of long liquidation or stop loss selling. However, the dollar has not forged a significant upside in morning trade action and the index could pull the index back into the prior two days trading range. Overnight according to Reuters South African November gold output declined by 4.6% on a year over year basis while South African October gold output was revised downward to a decline of 6.6% year-over-year. In the prior trading session gold ETF holdings declined by 7,062 ounces and silver ETF holdings declined by a notable 2.2 million ounces. Apparently, the reduction in gold ETF holdings was the 7th straight day of outflows. Overnight Chinese economic data was positive with respect to Industrial production expectations but was disappointing in retail sales and that could be consider a slight net negative result. We think gold and to a lesser degree silver are benefiting from Bank of American claims that inflation has peaked as that should help move the needle toward a Fed pivot which in turn should pressure the Dollar and improve economic sentiment for physical commodities. The trade should begin to look forward to this week’s US PPI release on Wednesday which has expectations of a month-over-month drop of.01%. Therefore, bullish fundamentals largely remain in place but risk-off, a higher Dollar, and a higher US rate environment give the bear camp temporary control. Platinum – The PGM markets should draft support against the risk-off vibe this morning because of a 22% November year-over-year decline in South African PGM production! Unfortunately for the bear camp, the Palladium charts are negative to start the holiday shortened week with a 7-day low forged and the lowest trade since January 5th. Near-term downside targeting is $1,700 unless the Dollar sustains a breakout above 102.395 and then targeting becomes $1,674. While April platinum has not technically broken down in the early going today, the charts are negative and a retest of $1,050 is probable if the Risk-off vibe becomes more serve and or the Dollar breaks out above the 102.395 level. The platinum market has another negative from a 1,737-ounce outflow from platinum ETF holdings.”

On Wednesday gold opened firm optimistically moving to $1925.00 on further news that inflation is cooling. This upward swing was encouraged as the dollar weakened and the Dollar Index dipped below 102.00 in early trading. But in typical fashion paper traders sold this rally at $1925.00, and gold closed virtually unchanged.

The latest US Producer Price Index declined by the most since the start of the Pandemic driven by lower costs for gasoline and food (Bloomberg). This may further encourage the Fed to reduce the size of interest rate hikes. Most professionals believe the FOMC will keep its options open. This caution produces the typical “give and take” process we see in pricing. A trade which supports the current trading range and remains defensive. This “worry mode” is seen in stocks today with the DOW down 400 points. Fed intention keeps Wall Street on a short leash.

I’m surprised that we are not seeing a great deal of physical selling at these elevated prices. There is some but generally the public seems to also be in a “wait and see” mode. Product premiums for quality bullion continue to move lower, which suggests someone is selling. But our average holding time for popular bullion products is still only a few days.

On the day gold closed down $2.80 at $1904.40 and silver closed down $0.41 at $23.53.

Zaner (Chicago) – “With the dollar rejecting a 4-day high upside breakout overnight and returning to the vicinity of this week’s low the potential for technically driven volatility today is very high. Obviously, the potential for fundamental volatility in gold and silver prices today is justified with December US producer price index readings for December scheduled for release and that data thought to be a very important Fed policy input. Expectations call for a contraction in producer prices of 0.1% which would clearly provide gold and silver with fresh buying interest. Furthermore, a decline in the dollar index below 101.46 will probably ignite a wave of currency-related buying. From the other hand, the gold market should draft fresh support from supply news over the last 24 hours, with confirmation of a continuation of a multiyear pattern of declining South African gold production and from news this morning of a 30% decline in full year gold production at Antofagasta. In a modest negative for gold this morning, ETF holdings yesterday were reduced for a 7th straight day with an outflow of 71,008 ounces and a year-to-date posting decline of 0.1%. Going forward gold and silver will obviously take a significant longer-term direction cue from today’s US PPI report as the markets micromanage inflationary expectations to predict the ultimate trajectory of US interest rates. In the end, traders should expect chain reactions in financial markets which in turn should prompt reactions in interest rates sensitive physical commodity markets. However, the gold market enters today’s action moderately overbought from a 3-week rally of $102. It should be noted that February gold saw wild trade following the US CPI release last week with the hour after the CPI release producing a trading range of $34. Similarly, the March silver contract following the CPI report forged a significant range of $0.70. While the most recent COT report was delayed due to a US holiday, adjusted for the gains after the last COT report was calculated, both gold and silver made significant gains leading us to conclude that the net spec and fund long in gold and silver this week are moderately understated! In fact, adjusted for the rally at the end of last week, we think the net spec and fund long in gold has reached 6-month highs with silver net spec and fund long positioning reaching the highest level since May of last year. Trends are up but would-be buyers should wait for retracements before entering the markets.”

On Thursday gold moved higher on the open touching $1922.00 before turning choppy at the higher end of today’s trading channel. This is interesting in that the Dollar Index was actually stronger, recovering from yesterday’s lows (101.5). And yet, gold is trending higher, suggesting perhaps that safe-haven buying is beginning to creep in around the edges of this trade.

Some analysts suggest that gold is overbought and hawkish comments from Federal Reserve officials have fueled recession worries. Boston Fed President Susan Collins said the Fed would need to raise interest rates to “just above” 5% and hold them there, the latest central banker to suggest a higher policy rate to combat inflation. (Reuters).

Gold’s technical picture looks solid. Still, our shiny friend must show pricing conviction above the important psychological level of $1900.00.

If this newfound confidence wavers in the face of higher interest rates traders will sell and gold will return to a defensive trade, at lower levels. Some believe that if recession fears become a reality this year, the gold market would move higher on the subsequent lower interest rates.

This is a logical conclusion, but a recession might prompt gold selling in a market looking for liquidity to cover other leveraged positions. It is not obvious but backing away from lavish Covid spending has created the most predictable and unpredictable market I have ever seen.

On the day gold closed up $17.70 at $1922.10 and silver closed up $0.22 at $23.75.

On Friday gold finished the day slightly higher, but higher, nonetheless. This may represent a small concession to those traders who believe the Fed is slowing down. But I’m suspicious of still higher prices in gold as long as the interest rate issue is not settled. And “settled” might take longer than anyone thinks because the mounting debt question is still a big loose end.

Reuters – “Commentary from Fed officials has pointed to a terminal rate above 5%, but traders still bet on rates peaking at 4.9% by June and see a 93.7% chance for a 25-basis point rate hike in February. Gold tends to gain when rate hike expectations recede because lower rates reduce the opportunity cost of holding non-yielding bullion. While there has been an accumulation of gold by various central banks and agencies, gold ETFs held by individuals have been decreasing. Were ETF buying to return, that would limit any overbought dip in the metal, said Caesar Bryan, gold portfolio manager at Gabelli Funds.”

On the day gold closed up $4.30 at $1926.40 and silver closed up $0.08 at $23.83.

Platinum closed up $6.10 at $1038.10 and palladium closed down $45.30 at $1713.70.

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