Gold – Powell – Some Plus Some Minus
Commentary for Friday, Aug 26, 2022 (www.golddealer.com) – Today gold closed down $21.60 at $1736.10 and silver closed down $0.37 at $18.74. Fed Chief Powell’s Jackson Hole speech was actually short but contained enough warnings about the dangers of inflation to push gold lower. He was not overly hawkish, a plus for the longer-term bullish gold scenario. And the jury is still out as to whether the Fed will raise interest rates a half point or three quarters of a point next month. Another plus for the gold enthusiast. All things considered I think the Chief did a lot to clear up some of the fear factor which always comes with a major shift in monetary policy. Don’t get me wrong here, the bears still own the technical picture. But Powell’s latest comments will not encourage the short paper. It is a bit early to see if traders buy this dip, but if they do it would also be a plus for gold bulls. Last Friday gold closed at $1747.60 / silver at $19.06 – on the week gold was down $11.50 and silver was down $0.32.
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On Monday gold was weak in the overnight Hong Kong and London markets and when the domestic trade opened it also sold off. Traders finally showed some interest at $1728.00 as New York bounced higher ($1740.00) before turning choppy. So, the bears continue to rule as the Dollar Index pushed towards a massive 109.00. This will notch a one month low for gold and a fresh 5 week high on the Dollar Index.
Economists believe the Fed will go with a modest half point increase in September, which would be welcomed news for bullish gold traders. But the paper trade believes the upcoming Jackson Hole central banking conference later this week will give Fed Chair Jerome Powell the opportunity to reinforce the US central bank’s hawkish stance on inflation (Reuters). This is the most recent reason for a stronger dollar and therefore weaker gold.
Personally, I believe gold and silver bullion are now oversold when you consider world demand. They figure to be as central banks line up to raise interest rates over the fear of inflation. We have seen this dynamic many times because of the confusion factor over rising interest rates. But as long as traders believe the Fed will overshoot rather than undershoot relative to their inflation expectations this market will remain defensive.
I’m looking forward to Powell’s appearance at the Jackson Hole conference. Could his comments push the price of gold lower? Sure, they could, but keep your eye on the bigger picture. The price of gold is cheap relative to the number of fiat dollars created since the beginning of the pandemic.
The Fed has been huffing and puffing since they began to raise interest rates. If they now decide to roar, they can only do so for a short time. Keep your powder dry, look for bargains.
On the day gold closed down $13.60 at $1734.00 and silver closed down $0.19 at $18.87.
Zaner (Chicago) – “With the dollar index forging another new high for the move and the 3rd highest daily trade of 2022, the initial weakness in gold and silver is fully justified. While gold ETF holdings on Friday increased by 69,512 ounces, last week gold ETF holdings declined by 307,558 ounces. Similarly, silver ETF holdings on Friday fell by a very significant 1.8 million ounces, with a weekly reduction of 1.38 million ounces last week. Chatter regarding the magnitude of the next US interest rate move (more news on that front is expected from the Fed symposium on Friday) and an established uptrend in the dollar leaves the bear camp in gold and silver in control. Granted, some Fed members have contrasting views, and therefore action in equities is likely to be the best proxy of the market’s expectations on the magnitude of next month’s hike. Fortunately for the bull camp, both China and India recently showed positive jewelry import demand. Indian gold imports up by 6.4% during the 2nd quarter and Chinese imports were up 7% in the first 4 months of 2022. With the recent COT net spec and fund long overstated (because of the $30 slide after the report was measured) the net spec and fund long remains low compared to readings since June of 2019. Gold positioning in the Commitments of Traders for the week ending August 16th showed Managed Money traders were net long 46,236 contracts after decreasing their long position by 6,561 contracts. Non-Commercial & Non-Reportable traders reduced their net long position by 3,339 contracts to a net long 157,338 contracts. In the end, the most reliable focus of the gold trade has been action in the dollar and the dollar appears to be poised for new contract highs later this week and will likely weigh heavily on gold prices in the meantime. The bias is also pointing down in silver but a very low net spec and fund long positioning (which is overstated due to the $1.15 break since the report was compiled), the market retains stop loss selling capacity. The August 16th Commitments of Traders report showed Silver Managed Money traders were net short 5,766 contracts after decreasing their short position by 463 contracts. Non-Commercial & Non-Reportable traders were net long 12,908 contracts after decreasing their long position by 1,354 contracts.”
On Tuesday gold was its unpredictable self, as the New York market drifted lower on the open and then surged, moving to $1755.00 before settling at the upper end of its trading range. The jump to higher ground was encouraged by a sudden drop in the Dollar Index of nearly a full point as traders saw some something, perhaps ominous in the European business model.
This morning Reuters claimed that euro business activity is in crisis. As weakening economies in Germany and France pile more pressure on markets as decades-high inflation and surging gas prices drag Europe towards recession, pushing the euro to a 20-year low against the dollar.
The idea of European recession is not new but for some reason the possibility now seems more important. It could be the reality that 6 months of Russian carnage in the Ukraine is not stoppable and not reversible. This realization may be seen in the recent UN and European attitude shift towards Russia. Both parties may realize that sanctions against Russia have not attained the desired outcome. And perhaps a practical political dialogue may save lives and treasure in what looks like a prolonged war with no winners on either side. This is a guess in complex situation.
The jump in gold could also just be the result of an oversold market and short covering rally. Fueled by real bargain hunting in China over the recent dip in prices.
The talk of European business trouble should also be given weight. It may suggest a “pivot” or shift in Fed hawkishness over the coming Jackson Hole get together. There is some talk that the Fed may be in an ideal situation of having its cake and eating it too if inflation numbers are moving lower and only minor adjustments in interest rates are necessary. This is a minority opinion but helps explains the sudden weakness in the US dollar.
What do we really know early in this week? Not much, except the reality that gold and silver are moving higher. I would not place too much emphasis on this move, you have seen that plenty of times during this transition period. And the technical picture still favors the bears. So be patient and wait for Jackson Hole results. Anything less and you are simply punching around in the dark.
On the day gold closed up $12.80 at $1746.80 and silver closed up $0.14 at $19.01.
On Wednesday gold opened choppy between $1745.00 and $1755.00 which suggested an early mild upward bias. This was supported by the Dollar Index which topped out this morning at 109.7 and suddenly lost a full point, either on dovish Fed rumors or an overbought position. The gold trade at these higher levels remains typically quiet for summer. There was some light bargain hunting, but higher prices were eventually capped by a rebound in the Dollar Index and gold closed virtually unchanged on the day.
Traders continue to focus on Chief Powell’s Jackson Hole comments later in the week. Wells Fargo this morning warned about “sticky inflation”. A prolonged inflation in certain important sectors that could be with us through next year. This warning is not new but is worth noting because it will help support the gold scenario regardless of interest rate direction.
Reuters – “Another dramatic spike in natural gas prices appears to have ended any hopes that Europe’s inflation battle is set to ease, with financial markets now bracing for higher prices, a faster pace of interest rate hikes and a deeper economic downturn.” Natural gas prices are up a whopping 12% this month. Russia is playing hardball and Europe has limited options.
On the day gold closed up $1.00 at $1747.80 and silver closed down $0.11 at $18.90.
Zaner (Chicago) – “While the gold market did not make a fresh higher high for the move overnight, prices have managed to consolidate above $1,750 and sit just under this week’s highs. Similarly, the silver market has extended a sideways consolidation around $19.00 and forged a quasi-side double low starting at $18.65. However, investment money continues to drain from gold and silver ETF holdings, with gold seeing a substantial outflow of 145,509 ounces and silver ETF holdings posting an outflow yesterday of 1 million ounces. Surprisingly, gold mining shares jumped yesterday along with gold futures prices, which suggest investor sentiment toward gold is not completely negative. However, despite a new contract high and sharp downside failure in the dollar index yesterday, the uptrend in the dollar from a fundamental perspective shows no sign of moderating. In fact, economic uncertainty in Europe from the ongoing war and talk of OPEC+ output reductions appear to have increased the appeal of US instruments, which in turn should pull even more money into the dollar! With gold and silver over the last 8 months failing to benefit from obvious flight to quality conditions, we are hesitant to suggest traders get long gold and or silver. If flight to quality interest was the source of yesterday’s rally in gold, that should have been confirmed by an influx of money into gold and silver ETF holdings yesterday and it was not. Unfortunately for the bull camp, the flight to quality buying arguments in gold and silver is not fully justified by a single day of strong upside action. From a technical perspective, the October gold contract did respect the Monday low yesterday and looking back, the slide off the mid-month high did not produce an increase in trading volume as is usually the case when fundamental value has been found. We prefer to sell a rally in October gold up to a 6-month-old downtrend channel resistance line of $1,797.75, with that short entry price falling to $1,792.85 on Friday. Clearly, the silver market did not benefit as much as gold from yesterday’s rally window and we attribute that to a distinct pattern of falling silver ETF holdings. We prefer to sell September silver on a return to a downtrend channel resistance line drawn from the April and August highs up at $20.37 today, with that resistance level falling to $20.23 on Friday.”
On Thursday gold presented another day of tight trading ranges with a mild upward bias. As the Dollar Index turned choppy at the upper end of its recent trading range (108.00 / 109.00). A strong dollar continues to cap gold gains, but the market remains defensive. Waiting for comment from Chief Powell this Friday.
The Jackson Hole conference carries big sway with traders and has in the past provided reliable guidance to the markets. But I’m not so sure this time around that much can be gained. The Fed playbook is transparent, and traders are ready for a hawkish approach to interest rates hikes.
If anything, I’m getting a bit optimistic about the bullish gold scenario. Because a light hand here figures. The Chief wants to create smooth action while keeping Wall Street away from the panic button. But this position is in the minority, traders figure the Fed will continue to bag away.
I’m hopeful for the best outcome which would include modest interest rate hikes over the next few years. In this scenario gold prices would not surge higher, but support would calm the metals markets. This approach would also give the world a better feel for what the economic picture will look like in the longer term. And it might even help the Fed avoid the kind of defensive stimulus package now be amped up in China as her economy slows.
Obviously, the big obstacle to higher gold prices is the strong dollar. But it is easy to lose track of how massively strong the US greenback has become this past year. This time last year the Dollar Index was trading around 92.00. With Europe going into the tank and the euro moving even lower the disparity between their currency and ours will crush trade. So, some sort of adjustment must be made, and this will likely be the so-called Fed pivot. If you believe the US is heading for recession next year, this likelihood of a weaker dollar is already baked into the cake and would result in a hundred or even two hundred dollar increase in the price of gold.
On the day gold closed up $9.90 at $1757.70 and silver closed up $0.21 at $19.11.
On Friday the gold market reacted to Powell’s comments as expected. Gold moved lower because interest rates are moving higher. But I think the definition of “higher” or “lower” is worth considering. “Lower” in a generally lower market is always exaggerated. And so is “higher” in a generally higher market. That is how momentum works psychologically. The trick is to hold both “higher” and “lower” in perspective. Easy to say, not so easy to accomplish.
An aggressive bear would have you believe gold will be trading at $1500.00 in the next few years, just consider interest rates. An aggressive bull would claim $2500.00 is a cinch, just look at growing inflation.
It makes more sense to embrace both a deteriorating world situation and higher interest rates – neither of which will be fixed anytime soon. I expect gold prices to move on either side of $1700.00, higher numbers will be sold. Lower numbers will create important bargain hunting.
I like the $1600.00 to $1800.00 trading range in place since 2020. Nothing much has changed and there is no reason to assume gold will collapse even if interest rates approach 3%.
That is still cheap money relative to inflation numbers worldwide. Do not speculate on paper positions and ignore “get rich” schemes which come out of the woodwork when the precious metals are in the headlines. Hold quality physical product for the long term. This approach won’t make you rich, but it will provide a quiet “secret” that insulates the family in case of emergency.
On the day gold closed down $21.60 at $1736.10 and silver closed down $0.37 at $18.74.
Platinum closed down $18.70 at $854.60 and palladium closed down $17.90 at $2120.40.
Zaner (Chicago) – “Seeing gold and silver prices start out weaker today is not surprising given the “feared” Federal Reserve chairman speech later this morning at the Jackson Hole symposium. In fact, most markets have already factored in some form of aggressive hawkish statements from the Chairman with action earlier this week! On the other hand, US scheduled data this morning could preempt the reaction to the Fed speech, with the Fed’s favored inflation gauge PCE, scheduled for release early today. Furthermore, the markets will be presented with personal income and spending readings both of which are expected to show strength. In other words, a soft PCE reading could mitigate the impact of hawkish policy views, while a hotter than expected reading could magnify hawkish Fed dialogue today. Unfortunately for the bull camp gold ETF holdings yesterday declined by 19,443 ounces and are now only 2.4% higher year-to-date. Silver ETF holdings managed a small inflow of 18,070 ounces and are 12% lower on the year. In retrospect, the recovery this week in gold and silver prices has gained some credibility with the markets ability to sustain gains over several trading sessions. Obviously, the gold and silver markets remain hypersensitive to the ebb and flow of dollar price action and likely will remain vulnerable to any further gains in US treasury yields. Therefore, action in gold and silver will continue to take significant direction from big picture/macroeconomic developments with little regard for classic internal physical supply and demand issues. However, an increase in mainland Chinese gold imports from Hong Kong provides a very small measure of fundamental support going forward. In today’s action, the edge should sit with the bear camp as the US Federal Reserve chairman is unlikely to allow inflation expectations to go unchecked with distinctly dovish statements. In conclusion, we suggest fresh short entry positions in October gold with a return to a 5-month-old downtrend channel resistance line at $1,785.40. Similar downtrend channel line resistance in September silver today is $20.23.”
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