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Gold – Remains Defensive

Gold – Remains Defensive

Commentary for Friday, Oct 7, 2022 ( – Today gold closed down $11.20 at $1700.50 and silver closed down $0.41 at $20.19. Gold dipped in price Friday on a solid jobs report which suggests the Fed will implement a 0.75% interest rate hike at the early November meeting. The market will also focus on key inflation data next week as well as Fed minutes (Reuters). Sentiment remains defensive and the trade generally falls into two trading categories. Those who believe the next rate hike (November) will do the inflation trick. And those who believe the Fed is behind the inflation curve and will continue with higher rates to the very edge of recession before pivoting. This is a big Fed gamble and will take months to sort out the details because it remains a work in progress. Expect a jittery trade in gold and silver until there is better clarity as to FOMC intension.  Last Friday gold closed at $1662.40 / silver at $18.96 – on the week gold was up $38.10 and silver was higher by $1.23.

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On Monday gold opened with significant buzz for several reasons. Treasury yields are moving lower, and this was reflected in the Dollar Index which moved from 112.5 through 111.5 in the early morning trade. Somewhat lower interest rates might suggest a less aggressive Fed, and today’s ISM (Institute of Supply Management) missed, hinting at an economic slowdown. But the “slowdown” scenario still looks like a reach.

It’s likely we are seeing increased world safe haven demand, led by the European Union. It is difficult to classify this $1700.00 push as a classic reversal, even with a $6.00 aftermarket. The Fed interest rate threat still holds the cards. Traders could sell this rally, capping further gains.

Buying the “dips” and selling the “rallies” is the normal these days. But this kind of trading could develop into a momentum trap for the paper trade. This Wednesday OPEC meets in Vienna for the first time in 2 years. The buzz is that they will cut oil production by a million barrels a day to stem declining crude oil prices. Such a serious move by the ministers could push crude towards $100.00/barrel, reinventing one of gold’s most bullish inflation scenarios.

Today’s price rise is significant as a reminder that problems in Europe and other hot spots should not be ignored. Still, the story of the world coming apart is an old hack in the gold business.

It’s better not to assume that everything is falling apart, because historically this has not been the case. But an aggressive Putin and China and now OPEC are “strange bedfellows”.

This idiom comes from William Shakespeare and is found in the Tempest. “Misery acquaints a man with strange bedfellows.” It is spoken by a man who has been shipwrecked and finds himself seeking shelter beside a sleeping monster. The word “bedfellows” is always plural, suggesting another idiom – “if it is not one thing it is another”. This wisdom seems ageless but is relatively new. It was first used by J.E Lawrence in the Nebraska State Journal in 1949!

On the day gold closed up $30.50 at $1692.90 and silver closed up $1.56 at $20.52.

Zaner (Chicago) – “A lack of significant reaction in gold to weekend rumors of financial trouble at credit Suisse, highlights the markets inability to embrace classic flight to quality concerns. Some talking heads this morning wonder if the European banking system is threatened with a “Lehman like moment” but if that were the case the US dollar and US treasuries would be significantly higher. Apparently, the gold market shifted its focus at the end of last week toward a slight decline in US treasury yields, and that combined with a new low for the move in the dollar last week gives gold and silver a slightly positive outside market bias to start the new trading week. In a very minimal demand benefit, the Indian government reduced the gold and silver import prices subject to importer taxes and perhaps some of that discounting will be passed on to consumers. December gold last week finished $46 above the lows last week and that might discourage bargain-hunting buying. On the other hand, with the most recent COT gold positioning report from September 27th registering the lowest net spec and fund long since early December 2018 and the market from that level into the low last week falling $24, the net spec and fund long could be approaching modern day trading lows. However, it should be noted that in October 2018 gold posted a net spec and fund short of 42,000 contracts. Last week gold ETF holdings declined by 1.1 million ounces and ended the week down 0.8% year-to-date. Gold positioning in the Commitments of Traders for the week ending September 27th showed Managed Money traders net sold 8,334 contracts and are now net short 41,300 contracts. Non-Commercial & Non-Reportable traders are net long 56,999 contracts after net selling 15,175 contracts. Similarly, the net spec and fund position in silver is fresh off a “net short”, and therefore a portion of last week’s late recovery was likely short covering/profit-taking in the wake of a 180-degree shift in outside market influences. The Commitments of Traders report for the week ending September 27th showed Silver Managed Money traders net sold 992 contracts and are now net short 8,087 contracts. Non-Commercial & Non-Reportable traders net sold 290 contracts and are net long 6,503 contracts. Unfortunately for the bull camp, outflows from silver ETF holdings last week were 5.2 million ounces a sign that investors remain cool toward silver.”

On Tuesday gold may have caught everyone by surprise as it built on yesterday’s safe haven gain. Prices in the New York cash market surged higher, touching $1730.00 as the dollar continued to weaken. The Dollar Index was significantly weaker, moving from a daily high (111.88) to a daily low (110.23). This dramatic shift may be the result of continued safe haven demand and momentum trading from yesterday due to continued international tension. It also lends credence to the theory that gold has confirmed a triple bottom in an oversold market.

This bounce also raises another possibility. Could traders be having second thoughts about Fed hawkishness when it comes to interest rates. This is an old theory that needs dusting off from time to time because it remains the center piece to bullish theory of higher gold prices.

Because the FOMC has been clear about their mandate to control inflation I remain cautious about the Fed pivot theory. But it is a possibility and who wants to rain on today’s good news. Let’s celebrate and be happy with gold at three-week highs, Treasury yields moving lower and investors hoping that the US Federal Reserve will tone down its pace of monetary tightening.  But, for now let’s keep the champagne in the frig and see if gold can make new recent highs.

On the day gold closed up $28.20 at $$1721.10 and silver closed up $0.52 at $1721.10.

On Wednesday gold moved lower, the New York cash market trading between $1702.00 and $1714.00 as the Dollar Index bounced higher – moving from 110.00 through 111.5 in early trading. The larger price swings in gold and silver these last few days are reflected in these large changes (both up and down) in dollar strength and Treasury yields. Some are calling higher prices in gold and silver since Monday a relief rally. But I believe most traders see these higher prices as a combination of fresh safe haven buying and rising international tension.

This morning’s price downdraft was not unexpected. It was typical as traders continue to “buy the dips” and “sell the rallies”. For now, that still makes good sense. The Fed has not equivocated, and other world banks are taking decisive inflation action by boldly raising interest rates. The dollar appears overbought. And has been for some time but I would not expect much downside. As the Fed will likely stick with its public agenda. Raising interest rates until they believe inflation is under control or at least stabilized enough to consider other options.

This week’s sharp rally in both gold and silver continues to reflect the confusion which pervades these markets. Looking at the shorter-term it may be safe to assume that higher interest rates continue to cap further gains in gold and silver prices.

The technical picture belongs to the bears. But the price bounce in gold a week ago ($1620.00) suggests a solid floor, helped higher by an oversold market. The resultant higher prices were favorable news for the bulls. Gold’s overhead resistance between $1750.00 and $1800.00 however still presents a challenge. This story is not new, we have been in this spot a few times as the interest rate question turns from hawkish to dovish and back to hawkish.

Expect a continued nervous market, with international news becoming more important. Larger price swings, followed by “quiet trading periods” is a reasonable model. Likely though 2023. There is great potential in the metals because few of the problems which pushed prices to recent highs have been solved. The Washington deep thinkers have talked these problems to death. To the point that the bulls and bears should get Scout badges for wearing down public patience. But until gold can show strength above $1800.00 and silver above $25.00 you might be better off spending your money on one of those fancy “noise cancelling” headsets used in aviation.

On the day gold closed down $9.70 at $1711.40 and silver closed down $0.56 at $20.48.

Zaner (Chicago) – “To start the Wednesday US trading session gold and silver are facing a negative pivot in outside market action, but OPEC+ rumors of a 2 million barrel per day production cut could ignite energy prices and in turn provide a very rare inflation inspired lift in precious metal prices. Granted, broad-based “risk on” environment this week has been accentuated by new lows for the move in US treasury yields and from a massive rally in US equities. However, we remain skeptical of the bull case, especially with December gold into the high yesterday $116 above last week’s lows. On the other hand, coming into the September spike low, the net spec and fund long position in gold was near the lowest level in 4-years and therefore outsized short covering is not that surprising. As indicated in other markets earlier this week, it appears the markets are beginning to factor in a potential end of the jumbo US interest rate hike cycle. In fact, expectations that the November rate hike will be the last 75-basis point hike could be in air with the trade seeing upcoming soft US jobs data as a reason for the Fed to slow its tightening. Clearly, this week’s US scheduled economic report flow contributes to the one and done November jumbo rate hike theory, with the month over month decline in construction spending the weakest in 18 months and the month over month decline in the Job Openings & Labor Turnover (JOLTS) statistics the largest in 30 months. However, the Fed has been very clear that its primary focus is to stamp out inflation and in turn accept weakening demand. On the other hand, speculative fervor has had the dollar in a freefall and of all outside market influences weakness in the dollar has been the most reliable bullish force in gold. Even though the decline in US implied treasury yields yesterday were not significant, short-term technical and fundamental forces project further softening of US yields. Unfortunately for the bull camp, precious metal ETF holdings continue to decline with gold holdings year-to-date approaching a decline of 1%, and silver ETF holdings year-to-date down 14%! In conclusion, a decline below 110.00 in the dollar index and an extension down to 109.07 is probably needed now for gold and silver to extend higher.”

On Thursday gold firmed and then drifted lower into the $1705.00 / $1710.00 as the Dollar Index rose from 111.00 through 112.00. And traders get ready for the latest US jobs data Friday. And additional inflation numbers next week. This morning’s trading might suggest that bullish gold sentiment is fading as the dollar grows stronger. Perhaps. The possibility of a lower trading range is being considered – something between $1675.00 and $1740.00 (Reuters). But keep in mind that today’s “sentiment” is a changeable “snapshot”. Gold recovered and closed virtually unchanged on the day. Now this is no big deal, I just mention it because it illustrates the lack of conviction on both sides of this trading isle. The best I can say it that the buzz created Monday and Tuesday has gone out the window – but it may return next week if the dollar weakens.

CNN Business – “When the Bureau of Labor Statistics releases its latest monthly jobs report on Friday, all eyes will be on whether the labor market is showing signs of loosening up – one of many crucial factors that will help the Federal Reserve determine its next steps in its fight against decades-high inflation. The US economy is forecast to have added 250,000 jobs in September, which would be the lowest monthly jobs gain since December 2020. The unemployment rate is expected to hold steady at 3.7%, according to Refinitiv estimates.” A significant miss would at least open the door to a less hawkish FOMC, but a hot reading would give the Fed more latitude and perhaps reinforce its resolve to slow inflation through higher interest rates. A negative scenario for gold prices.”

As if things were not confusing enough consider the following especially if you are interested in the physical market. There is a big difference between the daily paper trade and the physical market. The paper trade is volatile and unpredictable but can be easily played by professionals. The physical market – follows along but there is a big difference in pricing.

Premiums on live and delayed delivery gold and silver bullion remain high. Worse, the delay in delivery is getting longer directly from the world mints. Why this is true is not clear even between informed dealers. But it is possible that delay is related to some sort of hidden secondary market. Surprisingly the “ongoing premium” argument is seldom used to bolster the notion higher metal prices are already baked into this cake. But if you are considering the physical trade this aspect should be part of your basic planning.

I also believe that the modern “think tank” idea that inflation is not a “one and done” matter by the Fed or other central banks is getting more attention. This was once considered a radical idea but is at least being talked about in the media today. The notion here is that it took a long time for inflation to get to the point where it made the world uncomfortable. And many academics believe that it will also take a long time to unwind. This of course favors the bullish scenario but will require patience. Keeping this in mind is also good for basic planning.

On the day gold closed up $0.30 at $1711.70 and silver closed up $0.12 at $20.60.

On Friday gold dipped on the open ($1690.00), there was mild bargain hunting which created a short-term choppy trade. But the gold market remains defensive and drifted lower into the weekend. The weakness was a result of the jobs report released this morning.

The employment numbers were in line with expectations which suggests traders believe the Fed will continue down the road of aggressive interest rate hikes. In other words, the report was not bad enough to create any change in Fed hawkishness.

In a short week gold sentiment was volatile and pricing was on both sides of $1700.00. Still, the technical picture for gold remains bearish, capped by a strong dollar. It is important to note that gold did not exactly swoon for two reasons. The price of gold is already discounted, and demand of physical product remains steady. That does not mean we are out of the woods, but it might suggest continued moderation in price swings on the short term.

On the day gold closed down $11.20 at $1700.50 and silver closed down $0.41 at $20.19.

Platinum closed down $2.50 at $929.20 and palladium closed down $84.20 at $2182.30.

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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