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Gold – To Raise or Not to Raise?

Gold – To Raise or Not to Raise?

Commentary for Friday, Sept 30, 2022 ( – Today gold closed up $3.90 at $1662.40 and silver closed up $0.35 at $18.96. Gold finished the week on an up note and fresh safe haven demand as Euro zone inflation moved to a record 10%. Considering the talk of even higher interest rates, the bulls may have found welcomed shelter in this storm. Traders who do not believe the Fed can raise interest rates without moderation are in the minority. The FOMC has not equivocated a pinch in their public plan to fight inflation. Which buys them something on the front end but makes them vulnerable on the roll out. If they blink between now and the end of the year it would suggest they are worried. This would support the bullish contingent which from the beginning of this rate shift said that Powell would pivot. There is a lot at stake in this Federal gambit. On Monday, October 3, U.S. Secretary of the Treasury Janet L. Yellen will preside over a meeting of the Financial Stability Oversight Council at the Treasury Department. The meeting will consist of an executive session and a public session. The preliminary agenda for the executive session includes an update from staff of the Federal Reserve and the Commodity Futures Trading Commission on financial stability and energy market developments. This from a cynical teletype dealer calling this meeting – The Plunge Protection Team – a colorful epithet. Last Friday gold closed at $1645.30 / silver at $18.84 – on the week gold was higher by $17.10 and silver was higher by $0.12.

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On Monday gold seemed to steady itself between $1640.00 and $1650.00 in the early trade. Aggressive paper traders however sold this mild rally pushing the New York cash market to daily lows ($1625.00). The problem gold has this week is nothing new. The fear of higher interest rates has created unrelenting negative sentiment for our shiny friend. Since last Tuesday the Dollar Index moved from 110.00 through 114.00, a massive rise in 5 trading days.

This strength should be enough to remind the faithful that traders remain convinced the Fed will control inflation. September’s meeting saw a 0.75% interest rate hike. Judging from Treasury yields and increased dollar safe haven the last FOMC meeting of 2022 (December 13th and 14th) will also have the bulls hiding under the bed.

I believe however that successive interest rate hikes will create less and less change in the price of gold. These progressively lower prices will encourage even the timid to begin thinking seriously about the fine mess world governments have created for humanity.

For those who are biblically minded warnings from the prophet Isaiah concerning unjust rulers come to mind. For others get mad and loud. Constructive help for the poor and oppressed will be rewarded. Reuters – “Almost 17,000 Russians crossed the border into Finland during the weekend, an 80% rise from a week earlier, Finnish authorities said, as the influx of people continued in the wake of Russia’s announcement of military mobilization.”

On the day gold closed down $22.00 at $1623.30 and silver closed down $0.43 at $18.41.

Zaner (Chicago) – “On the one hand, the gold market at the end of last week saw a key chart support failure and downside extension from stop loss selling, and that should leave the bear camp in control to start the new trading week. On the other hand, the gold market last week initially held up impressively in the face of an aggressive US interest rate hike and a significant upside surge in the US dollar before succumbing to the big picture broad-based commodity market meltdown. However, with foreign central banks promising to raise rates in sync with the US, the dollar expected to aggressively extend its upside breakout and reports earlier last week of slower gold shipments into China, the gold market looks to be under ongoing pressure from inside and outside market forces.

Not surprisingly, gold and silver investors continue to flee ETF instruments with gold holdings year-to-date posting a minuscule gain of 0.3% and silver ETF holdings posting a year-to-date decline of 13%. In fact, silver ETF net sales for the year are 117 million ounces highlighting an ongoing exodus from the precious metals sector. Furthermore, Goldman Sachs has reduced its Chinese growth forecast for 2023 and that should add another element of suspect demand selling interest. Yet another big picture negative for precious metals and commodities in general is a forecast from Goldman Sachs predicting the Fed will hike rates 75-basis points in November followed by 50-basis points in December and a potential final hike of 25-basis points in February for a peak Fed funds rate of 4.75%.

Fortunately for the bull camp, the net spec and fund long in gold has declined significantly from the recent peak on March 8th (at 280,000 contracts) as the net spec and fund long has reached the lowest level since April 2019. If the post COT report price decline of $22 is considered and the net spec and fund long is adjusted, the market is likely at the least net long since November 2018! Gold positioning in the Commitments of Traders for the week ending September 20th showed Managed Money traders added 22,834 contracts to their already short position and are now net short 32,966. Non-Commercial & Non-Reportable traders net sold 37,372 contracts and are now net long 72,174 contracts.

While the December silver contract showed some respect for key support at $18.77 that level becomes a critical bull bear line in today’s action especially with silver extremely vulnerable to negative overall commodity price action. However, if adjusted for the post report slide of $0.50, the silver market is likely seeing its spec position nearing the record net short position of 13,966 contracts forged back in September 2018. The September 20th Commitments of Traders report showed Silver Managed Money traders net bought 364 contracts and are now net short 7,095 contracts. Non-Commercial & Non-Reportable traders are net long 6,793 contracts after net buying 2,742 contracts. While close in support levels might hold the bear camp retains control.”

On Tuesday gold saw a choppy market trading between $1632.00 and $1641.00 as the Dollar Index remained steady at 114.00 and market sentiment continued bearish. With growing world problems, including new talk of nuclear options from Russia I’m surprised we have not seen a reasonable bounce in gold prices. Especially at these new lower levels. But the upward pulses in the New York cash market this morning are more indicative of quiet short covering rallies.

Negative sentiment continues to create a heavy trade. Reinforced by a bearish technical picture. Which has paper traders considering a bear raid on the $1600.00 support level. But these paper markets continue froggy, even uncertain for professional traders. Because the trading line between “bull” and “bear” is not easy to discern as gold and silver prices trend lower.

Still, I remain a contrarian at these levels. Gold is offered at a substantial discount from highs ($400.00). And the growing “problems list” which auger in favor of physical ownership continues to get longer. The overriding concern at this point must be the mounting debt worldwide. This argument alone should move the needle in favor of the bulls. But for the time being the interest rate safe haven demand overrides common sense. The bulls will remain hunkered down and waiting to see what the Fed has in mind their next turn at bat.

On the day gold closed up $3.40 at $1626.70 and silver closed down $0.15 at $18.26.

On Wednesday gold caught a bid in the overnight London market which accelerated in the domestic cash New York trade. There was a mild softening of the Dollar Index, but this surprising jump is more likely the result of an oversold market, short covering, and renewed safe haven buying for those sensing a certain tension in the international trade.

The word “tension” is overused, but any of these portend a “domino” effect. The euphemistic UK “tax cut” plan created a dark hurricane in their bond markets. A break in that lynch pin means real trouble for England and the EU. Italy’s latest election suggests she is considering a modified kind of fascism. This is denied but default on her massive debt could lead to radicalization. Finally, the EU is worried that the Russian controlled pipeline which delivers gas to Europe may have been sabotaged. As the war in the Ukraine grows even more dangerous.

I believe this rally will be sold simply because traders fear even higher interest rates. But the reasonable jump in prices out of virtually nowhere is instructive. Typically, when sentiment is the most negative, the trade is the most negative. It is easy to lose your sense of perspective, in a large downdraft in pricing. But this world is pretty much the same, today, and tomorrow when it comes to government practices which eventually devalue their currency. Just keep in mind that devaluation is not a one-to-one occurrence. It is not easy to pinpoint graphically. Expect times when inflation is high and gold is low, or when inflation is low, and gold is high.

Analysts have also shown that there are periods when there is no relationship at all between gold and inflation. Insiders affectionately call this “trading the grind”. Which makes markets like we now have on our hands volatile and exasperating even to professionals.

On the day gold closed up $33.70 at $1660.40 and silver closed up $0.54 at $18.80.

Grant on Gold (Zaner) – (1) Gold fell 1.9% last week, dropping to a new 29-month low of $1639.74. (2) Silver slid 3.6% last week, retracing all of the previous week’s gains. While the white metal extended lower on Monday, the September 1 low at $17.56 remains well protected. (3) Platinum ended last week with a sharp loss of 5.8%. More than 61.8% of the gains notched in the previous 3-weeks have now been retraced. (4) Palladium remains consolidative within the broad range. The market is looking ahead to next week’s report on September auto sales, which are expected to be little changed versus August.

On Thursday the gold looked confused, with a choppy early trade between $1664.00 and $1658.00, making new lows – then gathering strength and moving towards $1670.00. A promising start but by the end of day the rally fizzled, and gold closed near unchanged. Yet, a promising aftermarket pushed prices higher by $6.00, again hinting at an upward trend.

Considering yesterday’s significant jump to higher ground the bulls were disappointed in momentum. This was troubling because the Dollar Index favored the bulls today. The index reached a trading high of 113.75 and out of nowhere collapsed into the 112.21 by noon. This should have rallied the bulls producing a second higher trading day. I looked for a stronger market because of my belief that yesterday “pop” was not “a relief rally” or “short covering”.

Yesterday’s strength could just as likely been an oversold reversal. Based on physical demand which is looking at $1650.00 support. In place and tested three times since 2020.

But I fear traders are likely to abandon reasonable pricing strategy if Fed officials offer hawkish interest rate comments. I refer specifically to Bank of Chicago President Evans. Reuters – Fed’s Evans: expect to reach top Fed policy rate by March – “The Federal Reserve is raising interest rates expeditiously to address very high, persistent inflation, and will likely get U.S. short-term borrowing costs to where they need to be by early next year, Federal Reserve Bank of Chicago President Charles Evans said Wednesday. Most Fed policymakers are penciling in a top Fed policy rate of 4.5% to 4.75% by end of next year, based on their projections published last week, and “by March we will be at that point,” Evans said at an event on current economic conditions hosted by the London School of Economics. Benchmark U.S. 10-year Treasury yields rose to their highest level in about 12-1/2 years on Tuesday as investors girded for higher interest rates that could possibly remain for longer than anticipated as Federal Reserve officials held firm in their hawkish stance. Since August 2, the 10-year yield has surged by 145 bps. The Federal Reserve has aggressively hiked interest rates by 3 percentage points this year, taking its target range to 3.00%-3.25%. It carried out its third consecutive 75 basis point increase last week and signaled that rates are likely to rise to the 4.25%-4.5% range by the end of the year.”

When traders hear “4.5% by year end” from an official source, their default position is to assume the Fed will send the US economy into the drink in their fight against rising inflation. My money is still on an alternate and moderate path because sector slowdown is already a reality.

The Fed will pivot but not abandon a sensible approach to higher interest rates. Which means we will have this interest rate conversation through next year and perhaps into 2024!

What makes this “transition” confusing is a strong argument against a change in the Fed’s interest rate plan. It claims that the Fed has no trouble driving the country into recession while taming inflation. Perhaps. But the same Fed would quickly and privately reverse direction if 4.5% interest rates began to crater the US stock market!

On the day gold closed down $1.90 at $1658.50 and silver closed down $0.19 at $18.61.

Zaner (Chicago) – “With the dollar index aggressively recoiling from a 20 year high and action in the dollar still “the primary driver of gold”, the aggressive short covering rally in gold and silver yesterday was not surprising. However, the source of the dollar rally does not appear to be the result of sustained change in fundamentals and instead is likely the result of an attempt by the Bank of England to prevent further slowing from inflation headwinds. On the other hand, the sudden 180-degree shift in Bank of England policy action might be a sign that at least one major central bank is poised to pause their aggressive rate hike efforts. Therefore, gold and silver were justified in noted “relief rallies yesterday”, but there does not appear to be enough evidence to suggest the bear trend in precious metals has come to an end. In fact, investors continue to be negative toward gold and silver with gold ETF holdings yesterday declining by 183,784 ounces which pushes the year-to-date outflow to 0.4%. Investors also cut silver ETF holdings by 656,652 ounces and those holdings are now 14% lower year-to-date. Certainly, gold and silver drafted support from the gas line explosions under the Baltic Sea as that increases the potential of a European winter disaster and dramatically increases tensions throughout the region. Unfortunately for the bull camp, gold has simply not displayed the capacity to consistently benefit from flight to quality developments and therefore the market will likely need further flight to quality gains to consider a shift in focus away from the dollar. In our opinion, we suggest selling December gold on a rally to $1,701.10, but the odds of a return to that level are now extremely low as the relief rally has likely ended.”

On Friday gold was choppy in early trading between $1662.00 and $1668.00 but quickly moved to highs on the day ($1676.00). Traders sold the rally in typical fashion, but support for the trading range remains intact and reflects Thursday’s firm aftermarket. These higher prices in gold are worth noting because the Dollar Index, trending lower since Wednesday bounced higher this morning. Yet gold remained firm. Safe haven demand is coming from the Euro zone, encouraged by record high inflation. International tension continues as war in the Ukraine grows darker and no one is offering a humane resolution.

On the day gold closed up $3.90 at $1662.40 and silver closed up $0.35 at $18.96.

Platinum closed down $1.30 at $870.00 and palladium closed down $28.90 at $2173.20.

Technical expert Jim Wyckoff (Kitco) – The December gold futures bears have the solid overall near-term technical advantage. Prices are in a downtrend on the daily bar chart. Bulls’ next upside price objective is to produce a close above solid resistance at $1,700.00. Bears’ next near-term downside price objective is pushing futures prices below solid technical support at $1,600.00. First resistance is seen at the overnight high of $1,682.90 and then at $1,700.00. First support is seen at Thursday’s low of $1,649.30 and then at this week’s low of $1,622.20.

September silver futures bears have the firm overall near-term technical advantage. Silver bulls’ next upside price objective is closing prices above solid technical resistance at $20.00. The next downside price objective for the bears is closing prices below solid support at the September low of $17.40. First resistance is seen at the overnight high of $19.185 and then at $19.50. Next support is seen at $18.465 and then at $18.00.

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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