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Gold – The Interest Rate Challenge

Gold – The Interest Rate Challenge

Commentary for Friday, Dec 10, 2022 (www.golddealer.com) – Gold closed up $8.30 today at $1782.90 and silver closed up $0.19 at $22.16. Gold dipped on the open today, but a hot Consumer Price Index encouraged traders to buy the dip and gold pushed towards $1790.00 before the usual profit taking round settled these markets into the weekend. Our November CPI showed yearly inflation moving to 6.8% which is the largest jump in a decade. President Biden suggested that November CPI numbers might be hot earlier this week, so the latest “higher inflation news” was not a big surprise. The FOMC has retired its dovish early “transitory” inflation assessment. Which suggests more hawkish action might be necessary. But there is widespread disagreement as to what the Fed has in mind – so tension grows as next week’s Tuesday/Wednesday meeting approaches. Surprisingly, bond yields dipped on today’s inflation news. Which suggests Wall Street does not expect aggressive interest rate action – a plus for gold. And with Christmas right around the corner I can’t imagine they will do much if anything. I still believe the Fed will skillfully dance around this interest rate conundrum by raising rates a small amount next year. This would “tap down” inflation and continue to provide enough cheap money to make Wall Street and Main Street happy.

Last Friday gold closed at $1782.00 / silver at $22.45 – on the week gold was up $0.90 and silver was higher by $0.29. A nicely stable week despite all the white trading noise.

The good news is that delivery on 2021 US Gold and Silver Eagles is getting better (still not “normal” but improving). And we are finally receiving early .9999 fine silver round orders. The bad news is that “any new orders” are 3 to 6 weeks coming from the manufacturer.

A trend worth noting. The Canadian Royal Mint is raising premiums. Likely because of inflationary pressures, transitory or not. Look for similar moves by other world mints.  

Should you decide to use our Delayed Delivery Program please talk with your service rep and understand how this program works. It is handy if you want to lock in the price “now” and insist on new product – but is not for everyone. Just like us – you must pay upfront to “lock in” prices and you can’t “change” your mind. So, unless God has blessed you with patience, please ask your rep for other options and thank you for your understanding.

Gold opened quietly Monday and drifted lower ($1776.00) before traders bought the dip, but the effort was unimpressive on the day and gold closed mildly in the red. Still a respectable finish considering a strong Dollar Index which seems comfortable in the 96.00 range. The Consumer Price Index will be out Friday, and “possible outcomes” will influence sentiment.

It’s surprising however that gold safe haven buying was absent considering Hong Kong’s Hang Seng fell 2%, giant Chinese property developer Evergrande will be removed from the China Enterprises Index and bitcoin prices turned volatile, dropping sharply over the weekend.

Still gold continues to struggle with current hawkish Fed sentiment – a prime mover which will come into and out of focus throughout the coming year. At this point gold’s technical picture could use a helping hand as prices have generally drifted lower since the big blow off in early November ($1860.00). We have seen bargain hunting, but the brutally strong Dollar Index has capped the bullish sentiment even though keeping physical product in stock remains a challenge.

This from Zaner (Chicago) – “The gold market did forge a fresh 3 day high early this morning but relinquished those gains in the face of a strong dollar and a partial risk off global equity market vibe. Apparently, news that the Perth Mint November gold sales almost doubled and noted early gains in crude oil are of little benefit to the bull camp in gold early today. It should also be noted that Perth Mint sales of silver increased in November to 1.53 million ounces from only 1.35 million ounces in October. The gold and silver trade is at least partially off balance because of the Goldman Sachs forecast predicting the US Federal Reserve will be forced to “double” its tapering rate in the months and quarters ahead. In retrospect, it appears that the gold market found speculative buying off the disappointing US headline nonfarm payroll report reading. However, it is also possible that gold drafted fresh buying interest from the significant reversal of a strong dollar rally. On the other hand, global infections continue to post worrisome readings and there have been forecasts of stagflation in some smaller economies. Furthermore, the trade retains a slightly hawkish interpretation of current Fed policy with some economists thinking the subpar US payroll reading for November will be revised sharply higher. Despite a significant rally last Friday, the February gold contract has remained below its 200-day moving average for eight straight trading sessions and the late November and early December downtrend pattern on the charts remains in place. Unfortunately for the bull camp, the net spec and fund long in gold adjusted for the action after the report was measured, suggest this week’s long position reading is understated. The November 30th Commitments of Traders report showed Gold Managed Money traders are net long 104,992 contracts after net selling 13,737 contracts. Non-Commercial & Non-Reportable traders net sold 12,325 contracts and are now net long 268,460 contracts. Perhaps the biggest bull force for gold heading into the new trading week is the falling yield condition in the US Treasury markets. In fact, US treasury yields are approaching the lowest levels since September! Fortunately for the bull camp in silver, the December silver contract aggressively rejected the $22.00 level at the end of last week and adjusted for the $0.70 slide into Friday’s low the net spec and fund long has probably been brought down to the lowest levels since October. The Commitments of Traders report for the week ending November 30th showed Silver Managed Money traders reduced their net long position by 2,309 contracts to a net long 27,578 contracts. Non-Commercial & Non-Reportable traders reduced their net long position by 5,745 contracts to a net long 53,164 contracts. Going forward, we see silver loosely following gold and at times outperforming gold in the face of significant risk on in global equities.”

Gold closed down $4.50 at $1777.50 and silver closed down $0.22 at $22.23.

Grant on Gold (Zaner)(1) Gold fell to a 4-week low of $1761.84 last week, weighed primarily by a more hawkish tone from Fed Chair Jerome Powell. (2) Silver remains on the ropes, weighed by worries about omicron variant demand destruction, the simultaneous possibility of tighter monetary policy, and a strong dollar. (3) Platinum closed lower last week, its third consecutive lower weekly close. The market dipped further on Monday, setting a fresh 10-week low at $920.50 and edging closer to the low for the year at $901. (4) Palladium is the one precious metal that closed higher last week and saw some modest upside follow-through on Monday. However, the recent plunge to new lows for the year leaves the downside vulnerable.

On Tuesday gold opened in typically choppy fashion but with a positive bias which is again surprising. The bearish gold scenario is supported by a rising Dollar Index which has gained nearly a half point since last Wednesday, rising stocks as Wall Street shakes off the latest Omnicom threat, and the rising fear that the next FOMC meeting (Dec 14-15) will either shorten the tapering timeline or worse suggest a timeline for the Fed to raise interest rates next year.

On the other hand, the recent rise in the price of crude oil supports inflation and hinders deflation. Traders will be eager to see the latest Consumer Price Index out this Friday. Obviously, a hot inflationary reading will help the bulls. Even a cool reading might suggest no immediate Fed action is necessary – also a plus for our shiny friend.

It is true that some paper traders continue to look for that “short trade” because gold pricing can’t seem to hold higher ground with authority and there is little buzz at these lower prices.

But I think the paper market is simply out fresh bullish information and has turned defensive – the old “wait and see” approach. The physical market is alive and well judging from the premiums and delayed delivery programs by most major mints. Inventory is difficult to keep in stock and more importantly about 1/3 of our recent business is new accounts. To me this suggests fresh interest, likely generated by cheaper prices. Finally, gold pricing has “flattened” out on both sides of $1780.00 and traders have regularly bought weakness.

Zaner (Chicago) – “In looking at the quote board this morning the gold market is one of the few physical commodity markets trading in negative territory in the face of a significant risk on reaction in global equities. However, we suspect selling in gold will be modest as strength in oil prices, the potential for Russian aggression and weakness in the dollar should provide cushion. However, seeing the gold market fail to rally in the wake of the Chinese reserve requirement ratio reduction has been seen as a sign of a weakening Chinese economy by the gold trade instead of a development that stokes inflation. On the other hand, Chinese export and import data was strong, with both measures “hitting new records on strong demand”. Unfortunately for the bull camp gold ETF holdings yesterday declined and are now 8.4% lower year to date highlighting ongoing anemic investor interest. Furthermore, silver ETFs declined by 1.7 million ounces but have remained 1.6% higher year-to-date. Issues that could suddenly ignite gold and silver on the upside include military aggression by Russia against the Ukraine, incendiary threats from Iran regarding its nuclear ambitions and sharp declines in US Treasury yields following a 30-year bond auction at mid-session. Fortunately for the bull camp, the prospect of a significant decline in US treasury yields is enhanced by today’s big picture broad-based risk on rally in equities. In the end, the gold market is left on the sidelines while silver should benefit from its classic physical commodity market standing.”

On the day gold closed up $5.10 at $1782.60 and silver closed up $0.26 at $22.40.

On Wednesday gold opened with a positive bias but lacked any conviction even as Treasury yields move somewhat lower. Perhaps suggesting next week’s FOMC gathering will not be as hawkish as previously thought. The trading point to remember here is that regardless of actual intent the Fed carries a big stick. Just the threat of using it will keep gold defensive.

From an optimistic standpoint gold pricing is holding up ($1780.00). The World Gold Council notes global exchange traded gold funds are adding product and the Bank of Canada left interest rates unchanged likely into next year – 3 big pluses for our shiny friend.

But gold’s lack of momentum keeps the bulls at bay as the bears look for weaker prices. The technical guys believe gold still holds a mildly positive edge. But I believe today’s gold trade is turning into a classic Goldilocks dilemma – “not too hot and not too cold”. The reason being that even with serious Russian aggression on the Ukraine border gold is yawning. Don’t get me wrong, there are developing scenarios which could push prices before year end. But I suspect politicians will win the day – kicking the can down the road – buying time. Traders will remain cautious, looking for something substantial – not FOMC suggestive conversation.

Zaner (Chicago) – “With the February gold contract in the early going today forging a 5-day high and approaching the 200-day moving average at $1796.15 the bull camp has a foothold. In fact, US gold prices are tracking higher despite a weaker track in from Chinese gold prices overnight. While gold and silver traders are already looking ahead to the overnight Chinese inflation reports for November, and ahead to the US CPI port on Friday, near term action is likely to be determined by oil prices, equity prices and the dollar. In retrospect, the gold and silver markets were lucky to have rallied yesterday, as a bigger than expected decline in US nonfarm productivity and an increase in US unit labor costs could have sparked hawkish Fed fears throughout the precious metals complex. However, seeing crude oil rally more than $3.50 (at times) and seeing one of the larger daily gains in US equities of the year certainly fosters inflationary psychology. What a difference several days can make in the markets as last week the trade was of a mind that the latest coronavirus twist would delay Federal Reserve tightening plans. Now, however, the pendulum has shifted with renewed projections of a quicker than telegraphed tapering of asset purchases. On the other hand, seeing strong Chinese export and import statistics provides a positive view toward the Chinese economy which in turn could help support precious metals off fresh hopes of physical demand. While it may be premature to consider Friday’s US scheduled data today, expectations for the Friday CPI report have expectations calling for an increase of 0.7% and that should spark inflation expectations again. Key points on the upside in gold are the 200-day moving average at $1,796.25 and then again at $1,800. Critical support today in February gold is seen at $1,771 and then again down at $1,762. As in the gold trade, the silver trade should have come away from the Tuesday action discouraged as a big picture risk on day failed to lift silver prices markedly. On the other hand, silver has not seen consistent investment interest perhaps because the gold market has not provided definitive and consistent bullish leadership. Fortunately for the bull camp, the silver market is cheap in the last 4 month trading range and the market appears to have found value on the charts above $22.00.”

On the day gold closed up $0.80 at $1783.40 and silver closed down $0.10 at $22.39.

On Thursday gold slipped lower in reaction to a firm Dollar Index (96.25). But there are other factors important factors to consider. Today’s Weekly Jobs Report came in hot – weekly jobs claims fell to a 52 year low suggesting a robust recovery. Tomorrow traders will look at the November Consumer Price Index. And President Joe has already signaled higher inflation. Finally, the FOMC will meet Tuesday and Wednesday of next week to consider a faster taper and perhaps interest rate modification.

And while the pandemic continues to complicate the recovery trying to suggest Fed action is problematic as they walk a fine line between “too much or not enough” control. The theory is that good news on the employment front will further encourage the hawkish FOMC. Whether they will change any financial dynamic is still a roll of the dice in my mind. But just the possibility of change holds sway, and the metals remain defensive.

Because embracing economic recovery makes sense the Fed will likely do something with interest rates next year. A quarter point hike will create no problem, but higher inflation might require a point or even two-point hike in interest rates. The higher the interest rate change the more Wall Street tension. Just consider the change to the cost of borrowing needed to create and sustain the leveraged utopia sold on today’s business channels.

Inflation and related factors have supported gold pricing but have not created new highs because the dollar remains strong. The puzzling question in the physical marketplace is just how long this strong dollar anomaly will hold up considering the debt load?

It is common today for traders to debate whether the pandemic’s need for massive Federal money also created an economic “bubble” with sizable downside. Don’t lose sleep over this dilemma – this is one of those perennial conversations that never seem to get answered. But in 40 years of trading, I never saw one coming, so it pays to be cautious.

Zaner (Chicago) – “Both gold and silver have started off on a softer footing with the declines modest and not indicative of an impending wholesale washout. However, the dollar has regained its footing, Chinese November inflation readings were just a touch above expectations and many physical commodities are tracking lower early today. Fortunately for the bull camp South African gold output in October reportedly declined by 3.5% but that was partially offset by a revision in September output from a decline of 6.9% to a decline of only 5.6%. On the other hand, the gold trade has not paid that much attention to classic supply side fundamentals lately. While the gold and silver markets are looking ahead to tomorrow’s monthly US CPI report (which is expected to have posted a gain of 0.7%) prices are likely to react significantly to today’s US initial claims especially if a new pandemic low is registered as expected. On the other hand, the gold and silver markets have not shown sensitivity to classic inflationary market developments yet and have not displayed sensitivity to flight to quality conditions recently. Eventually we see the markets responding to inflation, but until the headwinds from the omicron variant are extinguished, gold and silver could find it difficult to “come alive”. In a supportive development, the World Gold Council has released a report highlighting an improvement in western ETF interest in gold, but positive Western inflows to ETFs were offset by continued outflows from gold ETFs by Asian players. While the dollar forged a significant reversal yesterday, it could take a slide in the greenback below the late November low down at 95.54 to turn currency market action into a definitive bull influence on gold and silver prices. Unfortunately for the bull camp, the recent rally in gold was forged on declining trading volume and a modest liquidation of open interest and that could be a sign that the longs lack commitment and numbers. We see critical pivot point pricing in February gold at $1,780.10 and thickening resistance at the 200-day moving average of $1,796.15. Similarly in the March silver contract we see critical support at $22.02 and consolidation resistance at $22.635.”

On the day gold closed down $8.80 at $1774.60 and silver closed down $0.42 at $21.97.

On Friday gold pushed higher over rising inflation news but turned choppy on both sides of $1785.00, a traditional consolidation region since mid-November. On the shorter term I suspect gold will hold its current trading range, perhaps with minor downside if the dollar continues strong into 2022. But world gold demand is underpinned by fresh physical demand from China, India, and various central banks. Only about 50% of the world population has been vaccinated which leaves the door open for fresh safe haven demand as new Covid variants are discovered. Finally, keep in mind that no one knows for sure what will happen to the dollar as the Fed begins to unwind this massive pandemic spending program. The dollar could easily trend lower as the Fed avoids an aggressive interest rate policy. Under this scenario higher gold prices make sense.

Zaner (Chicago) – “A headline from Reuters overnight highlights the dichotomy in the gold market as it suggested gold is headed for its 4th weekly loss off “inflation jitters”. In other words, the fear of inflation is “pressuring” gold! Expectations for the November US CPI call for a gain of 0.7% and that apparently has the gold market fearful of action from the Fed. For the most part, we see the gold and silver trade chopping within a range defined as $1,796 and $1,750 in February gold and $21.50 and $22.50 in March silver. Unfortunately for the bull camp, today’s US inflation data is likely to be negative toward gold and silver prices as a hot number is likely to stoke hawkish Fed concerns. Yet another limiting force for gold and silver is signs that the dollar is in vogue and might finish the week very strong if US inflation reaches expectations of a gain of 0.7%. In retrospect, gold, and silver prices both fell back on favorable US jobs data yesterday which is evidence that the markets are currently fearful of the Fed shift thought to have taken place last week. In short, gold and silver appear to be caught in a bearish conundrum where good economic data and inflationary evidence results in selling! From a technical perspective, seeing the gold market close in the lower portion of its trading range Thursday and become entrenched under the 200-day moving average favors the bear camp. Fortunately for the bull camp, gold traders have seen open interest brought down significantly from the mid-November highs and that gives some credence to the prospect of solid support at the bottom of the December consolidation around $1,760. While not a major development, it should be noted that silver ETF holdings yesterday increased by 3.1 million ounces, and those holdings are now 1.8% higher year to date. Unfortunately for the bull camp in silver, the March contract severely damaged its charts yesterday and without a consistent trade back above $22.00 early today, we would not discount the potential for a late washout toward the September lows of $21.50!

On the day gold closed up $8.30 at $1782.90 and silver closed up $0.19 at $22.16.

Platinum closed down $3.50 at $933.80 and palladium closed off $63.70 at $1748.10.

My Brothers and Sisters, we thank you for your business and friendship. If you have unusual circumstances, need cash or are looking for a special visit – talk to Harry. All our in-house staff have received the vaccine and many now have the booster! And we continue to enforce safety standards between people and product. Be careful, this virus remains a danger. At the same time trust that God will soon get us back to normal. Richard Schwary

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