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Gold Weakens

Gold Weakens

Commentary for Monday, June 10, 2019 – Gold closed down $16.50 at $1324.70 today. Expected actually – gold has been predictably weak for years when approaching $1350.00.

There was an aftermarket surge in prices initially but even this settled down to a few dollars higher as traders consider gold’s stubborn overhead resistance at these levels.

The DOW roars so this is not helping safe haven demand as risk appetite moves higher.

I would say this looks like a healthy corrective pull back but as usual some caution is warranted.

The technical picture for gold still looks bullish but keep in mind we have seen an unusually strong rise in prices which has been in place since late May ($1280.00). This alone sets up the possibility of further profit taking but I think traders are looking for more of a choppy market as the paper players feel their way around.

The Dollar Index today was steady moving on both sides of 96.00 and crude oil this past week has been somewhat higher moving from $51.00 through $54.00 a barrel but the 30 day trend has been a drag on gold prices moving from $62.00 through $51.00.

This from Phillip Streible (Kitco) is interesting. “Just a couple weeks ago gold was on the edge and hugging the 200 DMA at $1274 where cautious bulls were carefully monitoring any potential break below this level before getting defensive. However, at that time we saw an uncommon phenomenon occur in treasury yields and this is what started this recent bull market and could keep it alive for months to come.

Ten-year treasury yields which move in the opposite direction from price have pushed down to 2.09% while short term rates like the 3-month treasury have held steady at 2.26% creating an inverted yield curve. This phenomenon has predicted the last four recessions and generally we see that recession occur within 7 to 24 months after the inverted yield curve has lasted for more than a quarter. Looking at the CME FedWatch Tool there is a 24.5% chance of a 25-basis point cut predicted at the June 19th meeting and an 87.4% chance at the July 31st meeting. This combination should continue to lend support to precious metals markets.”

I don’t see anything close to a recession in the near term but the financial markets both here and in Europe may not be as healthy as traders perceive.

Both us and the Europeans have embraced a very long term period of monetary expansion – debt is all over the place. I would not be worrying too much at this point but this kind of mismanagement builds in all sorts of unforeseen problems which might appear out of nowhere. 

This from Zaner (Chicago) – “Global equity markets overnight were all higher following a softening of tensions between the US and Mexico. It is a little surprising that the markets discounted suggestions from the US Treasury Secretary that the US would be perfectly OK with even higher tariffs on Chinese goods. In fact with the US trade deficit with China expanding again in the most recent data, a partial easing of US/Mexican tensions and a massive protest in Hong Kong regarding new extradition rules that would seem to favor the US over China in the trade conflict situation. The Asian session saw a first quarter reading for Japanese GDP revised upward to 2.2%. As suggested the May Chinese trade balance figures showed China’s trade surplus with the US increased to $26.89 billion versus a prior reading of $21.01 billion! Economic data released early this morning included the UK trade balance which saw a narrowing of its deficit, UK industrial production which declined by 2.7% and UK manufacturing production which also fell sharply. The North American session will start out with May Canadian housing starts which are expected to show a moderate decline from April’s annualized rate. April Canadian building permits are forecast to have a moderate downtick from March’s 2.0% reading. The April job opening and labor turnover (JOLTS) survey is expected to have a moderate decline from March’s 7.488 million reading.

Clearly the slight tempering of US/Mexican tensions has prompted an aggressive liquidation of gold with the additive pressure on gold seen from a bounce in the dollar. Suggestions from US officials that the US would be perfectly ok with increased tariffs on Chinese goods have been given little credence in the early gold trade this morning. Surprisingly the gold market has discounted news that Chines central bank gold reserves were 61.61 million ounces at the end of May versus 61.1 million ounces at the end of April. In fact the increase in Chinese gold reserves is the sixth straight increase in a row leading some traders to assume that China is in a gold reserve building mode. In our opinion, the soft nonfarm payroll reading last Friday probably increases the resolve of the Chinese in trade negotiations, but part of that potential windfall for Chinese trade negotiators is countervailed by the fact that US equities have recovered aggressively off the hope of Fed support of the US economy. While ETF holdings showed some noted inflows at the beginning of June holdings are still under the level seen on April 29th. While recent patterns have shown Chinese gold premiums to have expanded gold prices in Hong Kong closed lower today and that helped US gold to start the week out with a noted setback. With the most recent positioning report showing hedge funds and money managers increased their net longs it is not surprising to see increased volatility and a noted setback off a tempering of one of the key geopolitical conflicts. Speculative traders added significantly to their net long last week with the June 4th Commitments of Traders report showing Gold Managed Money traders are net long 117,915 contracts after net buying 84,781 contracts. Non-Commercial & Non-Reportable traders are net long 192,695 contracts after net buying 83,963 contracts. The June 4th Commitments of Traders report showed Silver Managed Money traders reduced their net short position by 19,111 contracts to a net short 19,931 contracts. Non-Commercial & Non-Reportable traders went from a net short to a net long position of 11,346 contracts after net buying 15,111 contracts.

Clearly the PGM complex did not participating in the influx of buying interest in gold and silver last week as PGM prices barely nudged upward. In fact, seeing much weaker than expected US scheduled jobs data last Friday, stories indicating lost PGM demand because of electric cars this morning, no improvement in US/Chinese relations and very low trading volume in palladium recently, it is clear that the bear camp holds an edge. It should also be noted that open interest in palladium has continued to erode from the March high in a fashion that suggests to us that it has lost the bullish buzz in place for most of last year. Palladium positioning in the Commitments of Traders for the week ending June 4th showed Managed Money traders net bought 216 contracts and are now net long 9,396 contracts. Non-Commercial & Non-Reportable traders were net long 8,903 contracts after increasing their already long position by 119 contracts. Despite the flare in prices, increasing open interest and higher trading volume last week the platinum market lacks a definitive bullish fundamental argument. In fact, platinum prices should remain very limited due to the deteriorating expectations for global auto sales. The June 4th Commitments of Traders report showed Platinum Managed Money traders are net short 12,714 contracts after net selling 2,586 contracts. Non-Commercial & Non-Reportable traders are net long 15,178 contracts after net buying 416 contracts.

With a downshift in one major geopolitical conflict the gold market has shown significant negative volatility overnight with a four day low and more two-sided volatility should be expected given an early higher dollar trade. However the August gold contract has seemingly found some support around the $1329 level and that level should be seen as a key pivot point today. On the other hand the $1325 level should be seen as a very important support level as we doubt that the markets will be presented with a straight line solution to US/Mexican tensions. On the other hand we expect US/Chinese relations deteriorating following news that Chinese trade surplus readings with US expanded again.”

Silver closed down $0.38 at $14.61.

Platinum closed down $0.90 at $803.70 and palladium closed up $29.10 at $1378.60. 

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