Gold Settles and Waits

Commentary for Monday, Feb 5, 2017 – Gold closed down $0.70 at $1333.00 in uneventful trading. Can’t say the gold trade was too exciting today – no buzz here. We opened around unchanged from Friday and have been moving higher and lower a few dollars the rest of the trading day. Gold’s 30 day trading chart tells the story – we were off to the races in early January – moving steadily higher and eventually challenging $1360.00 – at which time the bubbles disappeared – most likely because of a hawkish FOMC and rising interest rates.

So for now the technicians are defensive and wondering if gold’s most recent floor ($1330.00) will hold. The DOW is also in trouble as higher yields attract investment dollars and perhaps force gold liquidation to cover leveraged accounts – although that argument has always been a bit of a stretch.

So where are we? Actually gold remains solid but its turning “uninteresting” if there is such a term. We have moved upward like a rocket since early December from $1240.00. This of course made the bulls smile – but that usual and pesky resistance at $1340.00 has been in place since last September so it should not be much of a surprise that we are once again facing tough slugging. The price region between $1300.00 and $1400.00 has been a pain in the backside for gold since 2013. Gold has attempted many times to brake higher and in each case was talked down by the threat of higher interest rates which the FOMC has been peddling since they began quantitative easing a decade ago.

So for now look for more short-term profit taking. If gold breaks down at $1330.00 the next support line looks like $1300.00 and then $1280.00.

But my bet is that physical interest will pop up again before further weakness. The “handwriting on the wall” as far as interest rates is not as clear as Washington would have you believe. The 3 or 4 rate hikes talked about would crush both the stock and real estate markets.

And anything in the middle – after promising higher interest rates will support gold nicely.

If you are looking to buy – be patient – you have little to lose one way or the other. It is a fact that large sellers have left this market so those still holding physical metals are most likely in for the longer term.

The Chinese have had a tough to beat plan in place for years – centered on the simple fact that gold has no third party counter risk. They were the largest consumer of gold in 2017 and they kept all of the 429 tonnes they produced to boot.

Also note there are real sage commentators like Doug Casey ringing the warning bell. Major structural problems in the U.S. economy and around the world may create headwinds for the stock markets, said best-selling author, Doug Casey. “One big problem is the central bank,” Casey told Kitco News on the sidelines of the Vancouver Resource Investment Conference, “they keep creating trillions and trillions of new currency units.” Casey notes that while in the 1970s, money created by the central bank went to the retail level, now it’s going into the capital markets. “It’s all paper money, it’s going to dry up and blow away, and it will, and when it does, there’s going to be a lot of unhappy campers,” Casey said. One catalyst for a market correction would be the bursting of stock “bubbles,” particularly in the block chain and cannabis space, he added. More dramatic of a catalyst would be major geopolitical shocks. “We could wind up with World War Three,” Casey said, “I’m not just talking about what Trump and Kim are doing in Korea. There are many other things that could blow up in the world. In many ways, it’s like things were before World War One.”

I have never been one for end of the world financial scenarios but Casey has been around the block and is worth considering because some believe it will be a Black Swan scenario that sinks the world’s financial boat. Stay tuned – a 1500 point drop in the DOW today is worth noting – yes gold is quiet but there is plenty going on – perhaps more than what led to the 2008 collapse.

This from Zaner (Chicago) – “With the dollar showing initial signs of weakness and global equities remaining under significant pressure a slight upward track in gold and silver is not surprising to start the new trading week. The gold market is obviously tracking its financial/safe haven standing as the market overnight was presented with higher production from a Russian miner. In a negative demand side development India’s January gold imports were reported to have fallen to 17 month lows off slackening demand in the country. The Gold Fields Mineral Services report suggested that Indian buyers delayed purchases due to the anticipation of import tax cuts ahead which might mean the softer demand pattern is partially explained away. While the dollar is weaker compared to Friday’s close it is still sitting in the upper half of the last two weeks trading range in a fashion that has undermined gold slightly since the US nonfarm payroll Friday morning. In order to induce a fresh wave of currency related selling in gold might only require a dollar index trade back above 89.27 but that would appear to be unlikely given the anticipated weaker open in US equities. While the gold market does appear to be garnering some flight to quality interest due to the equity market action we get the sense that equity market anxiety will moderate later this morning. With the most recent net spec and fund long in the gold market weighing in at 243,124 contracts, the gold market clearly retains some stop loss selling fuel. Fortunately for the bull camp, the gold market into last Friday’s low was another $10 an ounce below the level where the positioning report was measured and that might mean the size of the net long is partially overstated. The action in the silver market at the end of last week was even more damaging, with the best hope of the bulls a psychological respect of the $16.50 level. While the latest silver COT positioning is overstated by the high to low slide in silver following the report of $0.70 we don’t see silver to be “mostly liquidated” until the net spec and fund long is 15,000 contracts or less. The Commitments of Traders Futures and Options report as of January 30th for Silver showed Non-Commercial and Non-reportable combined traders held a net long position of 47,557 contracts.

The PGM sector saw divergent price action Friday as palladium regained the upper hand on platinum as it finished the day in positive territory and that action has been extended this morning with platinum holding up better than palladium against early selling. It would appear that pressure in the PGM complex this morning is largely the result of the risk off extension in equities but perhaps the complex is partially undermined by news of increased platinum production from a South African mining company. Apparently Sibanye-Stillwater saw its 2017 production rise above its anticipated output. While the most recent net spec and fund long in platinum is probably overstated given the slide at the end of last week, that positioning remains significantly overbought at 51,264 contracts. Unlike the palladium market, the platinum market finished last week on a bearish note with the lowest price probe since January 16th! We suspect that the trade reversed long platinum short palladium spreads in the wake of a shift toward an overall bearish physical commodity market environment following the bounce in the dollar and the significant washout in equities. In the end, the platinum market would appear to sit right on a critical junction of $1,000 and we would suggest that level is a bull/bear pivot point today. At least in the short term, the palladium market looks to have a bit of overhead resistance at the $1,059.35 level and the failure to hold above $1,025.55 could pave the way for a slide back to the psychological $1,000 level. Like the platinum market, the palladium market net spec and fund long remains vulnerable to further liquidation at 24,557 contracts.”

Silver closed down $0.04 at $16.64. British Gold Sovereign

Platinum closed down $3.90 at $992.50 and palladium closed down $12.00 at $1036.90.  

The Unscientific Activity Scale is a “4” for Monday. The CNI Activity Scale takes into consideration volume and the hedge book: (last Tuesday – 3) (last Wednesday 4) (last Thursday – 3) (last Friday – 4). The scale (1 through 10) is a reliable way to understand our volume numbers. The Activity Scale is weighted and is not necessarily real time – meaning we could be busy and see a low number – or be slow and see a high number. This is true because of the way our computer runs what we call the “book”. Our “activity” is better understood from a wider point of view. If the numbers are increasing – it would indicate things are busier – decreasing numbers over a longer period would indicate volume is moving lower.

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