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Gold Takes a Breather

Gold Takes a Breather           

Commentary for Thursday, May 17, 2018 ( – Gold closed down $2.00 at $1288.20. So follow-through selling is not a big deal – yet. The fact that gold is now trading below all the major averages however suggests caution. Most think between now and the next FOMC meeting June 12th and 13th gold will continue to move opposite the dollar. Today for example the Dollar Index opened at 93.26 and we are now trading around 93.52 so slightly higher but not enough to prompt follow through selling from the $27.60 loss earlier this week.

What the market is waiting for now is the other shoe to fall (if there is one). Keep in mind that follow through selling is never guaranteed in a tightly traded market – the big drop may have worn out the sellers and being short gold for very long takes courage in the extreme.

Our phones are not ringing off the hook but activity is picking up as bargain hunting enters the picture – there is interest and the downstairs was crowded for several hours after lunch.

I’m surprised there was not more action this morning because there are many unresolved factors still at play. Everyone is talking about an aggressive FOMC but how aggressive is the question. That remains the primary issue on the table and the answer is unresolved.

The Venezuela oil problem is now a much bigger part of gold’s pricing equation – lower production and political unrest point to higher oil which underpins inflation and supports gold.

Are North and South Korea really going to work out their problems – yesterday’s “yes” is today’s “maybe”. And what about the building pressure surrounding Iran, Palestine and Israel? The Middle East is never an easy read.

Deficits are massive and growing and the birth rates in the US are at a 30 year low. This is the same situation Japan faces and the logical question is how are countries with big spending plans going to pay for this accumulated and generational debt? There has to be some “tipping point” which sets off financial concern as a reader recently commented.

And it was the FOMC and geopolitical situations which pushed gold from $1220.00 through $1360.00 – a run which began in the summer of last year. What has changed?

So is the recent sell-off another good place to enter the market?

It really depends on how you see the technical picture from gold’s most recent bottom at $1050.00 in late 2015. Pricing from that point has surged a number of times threatening $1350.00. These attempts to break into higher ground eventually failed but during this three year period gold put in progressively higher bottoms. And a rising bottom’s pattern is encouraging to those who like a deal and have the sand to take advantage of cheaper prices.

What backs this investment play is that the fundamental reasons for owning the precious metals remain in place. In fact if you believe that watering down the money supply is bad for business the case for owning the precious metals gets more profound.

And it’s not like pricing is horrible – 10 years ago the price of gold was $800.00 which sounds cheap in today’s world of crazy leveraged finance. So the longer term picture remains a plus.

Another pricing argument which augers in favor of gold today is the 5 year pricing model.

For the past 5 years the FOMC has been banging away at claiming higher interest rates are on the way. And surely 5 years is enough time for this market to throw in the towel and move lower if the fundamentals favored such a plan.

I like to point out that we have held pretty steady on either side of $1200.00 during this time. To me this suggests that gold has become stodgy and part of the establishment. Which might suggest today’s pricing while defensive represents fair valuation to those interested in a little financial insurance.

An added plus and overlooked these days are premiums on US Gold Eagles.

Today the premium or number you pay over spot is the cheapest I can remember in a decade. The public can buy Eagles at less than the Mint charges distributors by a substantial amount.

This amounts to an “insider’s discount” on top of cheaper gold pricing. And believe me the minute this defensive market turns around premiums will charge higher – they always do as demand reasserts itself.

So would I be “all in” at current pricing? Probably not but I would sure be interested in buying this developing weakness and would consider my downside limited. I rarely talk about “upside” in the gold price equation because the fact is that if you encounter a modern situation where everyone thought gold was a good idea the price would already be through the roof.

This from Zaner (Chicago) – “The dollar was modestly higher overnight and bond prices fell to a new low for the move, and this sent gold prices into new low ground. The gold market’s fate is tied to the dollar (and to bonds) these days, and with the dollar looking strong this morning, we could see further declines in gold. Bulls could be disappointed that comments yesterday by St. Louis Fed President Bullard that further rate hikes could restrict the economy did not appear to support gold very much. Nor has the market has found much strength from North Korea’s threat to cancel the summit, but it may have prevented gold from selling off further. Reports overnight that European leaders are ready to open markets wider to US to avoid a trade war are supportive to the dollar and negative to gold. The most recent COT report showed that as of May 8th, the managed money trader net long position had fallen to 52,621, not too off of its July 2017 low of 27,100, which coincided with a major low in gold. Considering that June gold has fallen another $28 from its low on Wednesday, that position could be approaching the July level, which could be considered “oversold.” However, it may be still too early to call for a bottom in gold if the dollar makes another new high today. In contrast to gold, silver was higher overnight and it has managed to stayed well above the May 1st lows in this week’s selloff. Equity market strength may have lent support to silver because of its industrial usage, but gold could also be considered overpriced relative to silver. In April, the gold/silver index reached its second highest level since 1995, and a series of lower highs and lower lows on the daily charts since then could the beginning of a correction.

July platinum seems to be following gold, as it traded to a new low for the move on Wednesday and overnight. In contrast, June palladium has been consolidating within its wide range from Tuesday’s selloff. Palladium supply/demand fundamentals are supportive, with an annual deficit expected again this year. The deficit forecast was recently reduced, and it is expected to smaller than last year’s, so the fundamental setup is not as bullish as last year, but the world is still expected to consume more than it produces. Look for support in June palladium at $954.30 with resistance at $1,003.70. Support for July platinum comes in at the contract low at $883.00.”

Silver closed up $0.11 at $16.41.

Platinum closed up $2.50 at $889.00 and palladium closed down $5.00 at $979.70. Platinum is now at a $400.00 discount to gold. The lower we go the more mines will shut down. This may be part of the reason for new highs in the rhodium ($2175.00) market. Rhodium is a by-product of platinum mining. With less platinum mining less rhodium would be produced. Platinum usage in industrial applications hit 2.08 million ounces in 2017, auto catalysts less scrap recovery was 1.80 million ounces – 2.25 million ounces in jewelry and only 275,000 ounces in investment demand. The low for platinum in 2017 was $880.00 – today close was $889.00.

This is our usual Thursday Chicago Mercantile Exchange report covering the last 5 trading days – so we are looking at the trading volume numbers for the “May” Gold contract: Thursday 5/10 (271142) Friday 5/11 (252680) – Monday 5/14 (246969) – Tuesday 5/15 (246322) – Wednesday 5/16 (233007) and the trading volume numbers for the “May” Silver contract: Thursday 5/10 (140897) Friday 5/11 (139242) – Monday 5/14 (135920) – Tuesday 5/15 (137494) – Wednesday 5/16 (138224).

The Unscientific Activity Scale is a “5” for Wednesday. The CNI Activity Scale takes into consideration volume and the hedge book: (last Thursday – 4) (last Friday – 3) (Monday – 2) (Tuesday – 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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