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Gold – Quiet Summer Trade

Gold – Quiet Summer Trade

Commentary for Friday, July 22, 2022 ( – Gold closed up $14.40 at $1727.10 today and silver closed down $0.10 at $18.59. Gold finished the week on some upbeat news and its first weekly gain in 6 weeks according to Reuters. Today’s PMI (Project Management Institute) suggests the service sector may be flagging perhaps pointing to recession. The Dollar Index is also moving lower, perhaps suggesting recession and Europe is showing similar slowing numbers. The idea here being that if recession fears turn into reality the Fed will be less aggressive on its interest rate program. At least that is the theory this morning. But this bullish gold scenario is a bit thin in my mind. For it to really work the FOMC would use a ¾ point rate hike at the end of this month and then turn its attention to recession problems. First, many believe there is no way the US is heading for recession, the probability being 1 in 4. And second the Fed would have to change its mind about inflation, or at least accept the notion that real interest rate by the middle of next year would be a point lower than their projection. This might work if inflation indeed proved transitory, meaning we have peaked but that is also a stretch. Last Friday gold closed at $1702.40 / silver at $18.55 – on the week gold closed up $24.70 and silver was up $0.04.

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On Monday gold managed a modest climb in the early New York market but drifted lower on what looks like a typical profit taking round. This relatively firm market is adjusting to a weaker dollar and moderately higher crude oil prices. The Dollar Index began to break down last Thursday (109.00) and has continued weaker even today (107.00). Which might suggest traders have dumped the notion that the FOMC will use a full point jump later this month.

Reuters – “Recent readings on inflation came in above expectations but showed signs that higher prices may be starting to ease, giving the U.S. central bank a possible cushion to raise interest rates at a smaller 75 basis points increment.

“I know we just had two bad headline numbers, but the evidence on inflation is becoming more and more pronounced that it is rolling over, the commodity upward inflationary thrust, the leading edge of commodities, has turned into a deflationary trust,” said Jim Paulsen, chief investment strategist at The Leuthold Group in Minneapolis.

“What the market is starting to sniff out is that yeah, the Fed is going to put its funds rate into the same ZIP code that the free market rates are at – that is two and a half-ish percent – but once it is there, it might be done for a while.”

If the Europeans raise rates less aggressively, a possibility (Reuters). And there is a shortage of crude oil, suggested by rising prices, trader psychology could become less bearish towards both stocks and the metals. It is not a stretch to believe this market got carried away over interest rate expectation. Last week most everyone was talking about lower prices in gold.

It is not as though those interest rate clouds have disappeared. But they seemed a bit less threatening at the beginning of this week. Sprott brings up an important point which may support the bullish gold scenario – “There may not be a quick fix for inflation.” Prices below $1700.00 for gold are not off the table but today’s trade suggests more stability. A small win for gold and silver bullion buyers trying to understand why manufacturers are still behind the demand curve.

On the day gold closed up $6.80 at $1709.20 and silver closed up $0.24 at $18.79.

On Tuesday gold continued rather flat in quiet trading as analysts ponder the next interest rate move by the European Central Bank. I believe they will go with a half point rise but there is some speculation that perhaps only a quarter point will be used. If so, this would help the sagging US market and perhaps at least slow down the still hyper FOMC rate hike sentiment which will become a reality at the end of this month (July 26th and 27th).

The gold price is also supported by a weaker Dollar Index. Since Thursday of last week, the index has moved considerably lower, but this decline has flattened (106.00/107.00). A minus sign for gold if the short paper decides to test support ($1700.00). Hedge funds are moving away from gold. And professionals see gold’s inability to take advantage of recent rallies as the handwriting on the bearish wall. To be fair, negative sentiment has been gold’s next-door neighbor for some time but the public scoops up quality bullion products as prices move lower.

Still the gold trade seems lighter this week as our shiny friend is at least holding up in the supercharged environment of higher central bank interest rate increases.

Silver bullion may catch a break as investment interest rises in China. But as usual there is the typical confusion factor as to the complete story. (Reuters) – “Silver is benefitting from a continued rise in Chinese interest for the white metal. However, reports that major Chinese banks will suspend investors from taking new positions in gold and silver by August are blurring the outlook for this signal,” TD Securities said in a note.

Grant on Gold (Zaner) – (1) Gold ended last week down 2%, establishing an 11-month low at $1707.42 on Thursday. It was the fifth consecutive lower weekly close. (2) Silver lost just over 3% last week, dropping to over a 2-year low of $18.14. It was the seventh consecutive lower weekly close. (3) Platinum closed down nearly 5.9% last week, erasing the previous week’s gains and then some. (4) Palladium tumbled 15.8% last week, retracing nearly all the gains realized in the previous 3-weeks.

On the day gold closed up $0.80 and silver closed down $0.12 at $18.67. Crickets.

On Wednesday gold was choppy with a mild downward bias. Paper traders are waiting for further downside adjustment as the technical picture belongs to the bears. Still the lack of fresh news requires caution. Barron’s latest was surprisingly upbeat for Europe as gas supplies might not be cut off, easing fears that a worsening energy crisis would damage the region’s economy.

Keep in mind that this market remains drama orientated. The worst possible FOMC and world scenario are daily headlines. But this disaster sentiment is transitory because there is still plenty of money floating around. And it must be deployed in some fashion. If the predicted storm clouds clear, even a small amount, the metals will get more attention.

It is not news that the US public is not happy over inflation. But in what must be one of the great counterintuitive moves they are not much interested in buying gold, at least for the present. As I have said before they are willing to wait and see if the FOMC can deliver as promised. Reuters – “President Joe Biden’s public approval rating fell to 36% this week to tie the lowest rating of his 19 months in the White House as inflation takes its toll on American life, according to a Reuters/Ipsos opinion poll. Biden’s lowest ratings have rivaled the lows of his predecessor, Donald Trump, whose popularity bottomed out at 33% in December 2017.”

Jim Wyckoff (Kitco) – “Technically, August gold futures bears have the solid overall near-term technical advantage. Prices are trending lower on the daily bar chart. However, the recent “collapse in volatility” on the daily bar chart (whereby at least three price bars in a row are significantly smaller than previous price bars) suggests a bigger price move is coming soon. It’s important to note that markets typically vacillate between periods of higher volatility and lower volatility, and at present the gold market is in a period of low volatility. Bulls’ next upside price objective is to produce a close above solid resistance at $1,750.00. Bears’ next near-term downside price objective is pushing futures prices below solid technical support at $1,650.00. First resistance is seen at this week’s high of $1,722.00 and then at $1,735.00. First support is seen at $1,700.00 and then at the July low of $1,695.00.”

On the day gold closed down $10.50 at $1699.50 and silver closed down $0.03 at $18.64.

On Thursday gold reversed Wednesday’s loss and moved higher because of several factors. First, the weekly jobs claims moved higher for the third week in a row. Suggesting perhaps a slowdown in growth which was eventually reflected a half point drop in the Dollar Index.

But the index remained choppy, so you would likely call this small bit of joy to the bullish gold scenario transitory. The thinking behind this scenario is that the dollar is overpriced. The EU is getting their gas from Russia, And ECB President La Garde raised EU interest rates an oversized half point. This was the first such move in 11 years, so it is significant. The bulls theorize that the metals are oversold and look for these kinds of transitions to produce the next rally.

I believe the strength in gold today is the result of two factors. Increased safe haven demand coming from a confused economic picture in Europe. More importantly you are looking at a typical short covering rally in a paper market. With gold being off $350.00 since March and a bearish technical picture the paper default position is always looking to reinvent the word “short”. Especially when bearish information piles up over a relatively long period. There is an old trading caution here – “it works, until it doesn’t”. The pop back above $1700.00 was the short covering rally. The additional $6.00 in the aftermarket was safe haven demand.

On the day gold closed up $13.20 at $1712.70 and silver closed up $0.05 at $18.69.

On Friday the bulls got excited as gold touched $1740.00 in the New York spot market. The joy however was short-lived as traders sold the rally and our shiny friend drifted lower. Still today’s higher close snapped a 5-week losing streak.

And small bullish rumors are creeping into the trader talk around morning coffee. But the 60-day gold pricing chart looks miserable as gold moved from $1850.00 through $1700.00, so the technical picture remains bearish.

Still, gold is holding above the rather tenuous $1700.00 support so traders will assume that the coming rate hike is already reflected in today’s price.

If the FOMC does not get crazy at the end of the month you might see bearish sentiment lighten. As far as calling a bottom the smart money is keeping their powder dry. Even the physical market slowed today. But the bulls welcome a hopefully quiet weekend.

On the day gold closed up $14.40 at $1727.10 and silver closed down $0.10 at $18.59.

Platinum closed up $4.10 at $861.20 and palladium closed up $142.10 at $2013.20.

My Brothers and Sisters, thank you for your business and friendship. If you have unusual circumstances, need cash or a special visit – talk to Harry. All our in-house staff have been vaccinated and have the booster! We continue to enforce ridged safety standards between people and product. Be careful, the contagious Omicron variants remain dangerous. At the same time trust that God will soon get us back to normal and our traditional business model.  As always, thank you for your patience. Richard Schwary

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