Gold – 8 Month Highs – Fresh Hopes

Commentary for Friday, January 13, 2023 (www.golddealer.com) – Today gold closed up $22.90 at $1918.40 and silver closed up $0.37 at $24.23. Gold finished the week on renewed hopes of a less hawkish Fed and the first CPI signs of slowing inflation. The bulls own the short-term technical picture, which usually brings in fresh speculative money. But I think long lived professional traders are abundantly cautious. The recent significant weakness in the dollar could be an overreaction. And veteran traders ask a reasonable question: Suppose the Fed does not follow through and slow interest rates hikes? The bulls needed this latest positive shift in sentiment. And it will encourage the physical market. But I would not bet the farm on anything the FOMC has in mind either publicly or privately. They are still punching around in the dark hoping for a soft landing. And the real inflation fallout from worldwide Covid spending may take years to fully understand. Last Friday gold closed at $1864.20 / silver at $23.82 – on the week gold was higher by $54.20 and silver was higher by $0.41.

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On Monday gold pushed to 8-month highs ($1880.00) as the dollar weakened and traders again considered the possibility of a less hawkish Fed interest rate agenda. Gold prices eventually settled as traders sold the rally, which is surprising considering the Dollar Index dropped 2 full points between Friday and today. Still, I believe this market will waver considerably depending on what looks to be “continual sentiment shift” as traders discern the latest Fed intention.

The prime mover of this sentiment in the short term will be the January CPI Report. Keep in mind that the Forbes January “snap shot” is considering December data. That fresh information is expected to show inflation trending lower. This will give the Fed more room, suggesting they could get away with a smaller quarter point hike the next time around. Most professionals believe that rising inflation rates over the longer term will take stronger Fed medicine. If this theory is correct positive gold sentiment will continue to come in and out of focus.

(Reuters / Seher Dareen) – Gold hits 8-month peak as dollar slips on Fed slowdown bets – Gold prices hit an eight-month high on Monday, helped by a drop in the dollar after U.S. economic data late last week raised hopes for slower rate hikes from the Federal Reserve going forward. The dollar slipped 0.7% to its lowest in seven months, making gold cheaper for overseas buyers. Benchmark U.S. 10-year Treasury yields were hovering near a three-week low. “Interest rates are looking like they’re going to continue higher. But they do have a limit of what they can do and the market is pricing that in,” said Bob Haberkorn, senior market strategist at RJO Futures. Money market bets show 75% odds of a 25-basis point hike at the Fed’s February policy meeting, with the terminal rate expected just below 5% by June. Higher interest rates dim bullion’s appeal as an inflation hedge and raise the opportunity cost of holding the non-yielding asset. Traders now await Fed Chair Jerome Powell’s speech at a central bank conference in Stockholm on Tuesday and closely watched U.S. consumer price index data due later this week that could offer more cues on the U.S. rate hike path. “We are also seeing some flight to safety. Technically, gold looks like it has more room to go because it’s been strong through all these resistance points that we continue to see.” Gold prices jumped nearly 2% on Friday after data showed a moderation in U.S. wage growth and a contraction in activity in U.S. services industries in December.

On the day gold closed up $8.50 at $1872.70 and silver closed down $0.11 at $23.71.

Zaner (Chicago) – “With the upside breakout in gold prices today, the market should attract positive headline coverage, especially with growing hope for soft landings surfacing from economists on both sides of the Atlantic. Apparently, the gold and silver markets have become more patient with significant gyrations in the US Dollar seemingly resulting in a return to the down trend status in place prior to the recovery last week. Clearly, several US financial markets at the end of last week took the US jobs data and have begun to look for a case to bring the Fed to a less hawkish stance. In our opinion, the jobs data Friday, and data over the last several weeks have been “Goldilocks data” which for equities, gold, treasuries, and many physical commodities could be the best overall market condition for the coming quarter. With gold and silver price strength extending into a third month and positive inflows to gold and silver ETFs at the end of last week, perhaps investors will be attracted to the sector. However, gold holdings are up only 0.1% and silver holdings are down 0.3% year-to-date. In yet another potential major bullish development signs of increased central bank gold buying are surfacing and extending a developing pattern of buying with reports overnight that the Peoples Bank of China bought 30 tons of gold last month after purchasing 32 tons in the month of November. As indicated by the IMF back in the 4th quarter of 2022, central bank gold activity can be delayed in reporting with many central bank purchases not confirmed until months and quarters after the fact. Furthermore, with many other markets displaying “chop” seeing the gold market reach the highest level since June and seeing the silver market last week fill a series of gaps from last April, that should create some bullish buzz. Unfortunately for the bull camp, the gold and silver bulls are likely to need consistent support from a weaker dollar and steady to lower US treasury yields. After the silver market forged a very significant 3-day correction of $1.50 it should be bought on a test of uptrend channel support this week down at $23.34. The Commitments of Traders report for the week ending January 3rd showed Gold Managed Money traders net bought 5,473 contracts and are now net long 72,805 contracts. Non-Commercial & Non-Reportable traders net bought 8,258 contracts and are now net long 178,119 contracts. While the silver market forged an aggressive washout from the COT positioning report, the spec long last week was the highest since April 2022! Silver positioning in the Commitments of Traders for the week ending January 3rd showed Managed Money traders were net long 29,385 contracts after decreasing their long position by 802 contracts. Non-Commercial & Non-Reportable traders added 1,117 contracts to their already long position and are now net long 46,370.”

On Tuesday gold was surprisingly steady, which suggests Chief Powell’s comments this morning about the necessity of Fed independence helped hold together the “right” forward expectation. Jerome was not hawkish enough to discourage Wall Street and yet struck a dovish enough tone to counterbalance yesterday’s hawkish comments from both San Francisco Fed President Daly and Atlanta Fed President Bostic. This is another great example of how adept the Fed has become at avoiding those bumps along the way, while they continue to consider higher interest rates. Some analysts saw the Chief’s comments as hawkish enough to prompt short-term profit taking. But this was not the case. The big question, however, remains – how long can the Fed keep this top spinning? While avoiding recession and keeping Wall Street happy?

This is not an easy path as 2023 presents a unique set of clashing monetary and political forces. Most of which do not have simple solutions. The interest rate “adjustment” will be a matter of doing the math, not easy but workable. And we could get lucky.

At any rate Jerome was agile enough to persuade traders to refocus on this Thursday’s Consumer Price Index (CPI). Rick Santelli’s (CNBC) semi-joke today was that investors should hope that these latest numbers show significant slowing of inflation. The implication being that if they do not the financial markets and by extension Wall Street could be facing big storm clouds.

There are other problems also being ignored for the moment. Like Russia’s determination in the Ukraine and the continued worldwide damage created by Putin’s paranoia. Let’s also not forget the dangerous reversal of the strict Covid protocols in China. This could deliver another world health menace if Beijing fumbles the ball. These two factors alone present enough uncertainty to underpin gold prices in the short term. And may already be creating fresh safe-haven demand.

On the day gold closed down $1.10 at $1871.60 and silver closed down $0.20 at $23.51.

On Wednesday gold saw a mild downdraft on the open on light profit taking as traders braced for tomorrow’s latest inflation reading. Still gold sentiment remains naively optimistic as traders bought the dip and gold pricing stabilized around $1872.00.

(Reuters) – “The U.S. consumer price report will be closely watched for cues on Fed’s strategy after the U.S. central bank slowed the pace of its rate hikes to 50 basis points in December after four back-to-back 75 bps hikes. Traders see a 77% chance the Fed will raise the benchmark rate by 25 bps to 4.50%-4.75% in February and see rates peaking at 4.92% by June. “This could be a big report if we get another good reading that shows inflation falling faster than anticipated,” said Craig Erlam, a senior market analyst at OANDA, adding it could be enough to change the hawkish tone the markets are continuing to hear from the Fed. While worries remain about over the scale and impact of the COVID outbreak in top gold-consumer China, “over the longer term, China is expected to bounce back strongly which could stimulate additional demand.”

On the day gold closed up $3.00 at $1874.60 and silver closed down $0.18 at $23.33.

Technical Analysis by Jim Wycoff (Kitco) – “February gold futures prices hit a seven-month high again today. Bulls have the solid overall near-term technical advantage. A two-month-old uptrend is in place on the daily bar chart. Bulls’ next upside price objective is to produce a close above solid resistance at the $1,900.00. Bears’ next near-term downside price objective is pushing futures prices below solid technical support at $1,800.00. First resistance is seen at today’s high of $1,890.90 and then at $1,900.00. First support is seen at this week’s low of $1,869.30 and then at $1,850.00. March silver futures bulls have the firm overall near-term technical advantage. However, a four-month-old uptrend on the daily bar chart has stalled out again. Silver bulls’ next upside price objective is closing prices above solid technical resistance at $25.00. The next downside price objective for the bears is closing prices below solid support at $22.00. First resistance is seen at $24.00 and then at this week’s high of $24.285. Next support is seen at the January low of $23.26 and then at $23.00.”

On Thursday gold bulls got a wonderful surprise, when CPI numbers suggested that inflation is cooling! And there were several frostings on this cake. The dollar dropped to seven-month lows and Fed Bank of Philadelphia leader Patrick Harker said the end stage for the central bank’s rate hike campaign is in sight. Reuters – “Gold prices pared gains after earlier jumping more than 1% to above the key $1,900 per ounce pivot on Thursday after data showing signs of cooling inflation in the United States boosted bets for slower rate-hikes from the Federal Reserve ahead. U.S consumer prices unexpectedly fell for the first time in more than 2-1/2 years in December amid declining prices for gasoline and other goods, suggesting that inflation was now on a sustained downward trend. “The expectations clearly look like at this point, we’re going to see two more 25 basis point rate hikes at the next two Fed meetings,” said David Meger, director of metals trading at High Ridge Futures. “We continue to focus on the idea that the Fed is getting that much closer to the end of their interest rate hike cycle … the underlying environment for gold remains strong.” Money market participants see a 89.6% chance the Fed will raise the benchmark rate by 25 basis points in February. Following the CPI report, the dollar dropped 0.5% to its lowest since early June, making gold more attractive for other currency holders. While a separate report from the Labour Department showed initial claims for state unemployment benefits fell last week, signs of inflation decreasing took precedence.”

So, with all this good news, why did the paper trade sell this rally at $1900.00? In my opinion they are not fully convinced. Analysts may want to see something more than the first signs of slowing inflation. An actual slowdown in the number and size of the next round in rate hikes would get more people on the same page. I’m still not convinced the price of gold can compete with higher interest rates. The physical market might continue with prolonged range trading, not necessarily at the higher end of its recent pricing spread. At the same time premiums may continue to move lower, depending on how this dynamic plays out worldwide.

On the day gold closed up $20.90 at $1895.50 and silver closed up $0.53 at $23.86.

Zaner (Chicago) – “With February gold into an extremely important CPI report sitting nearly $60 above the January low and recent gains forged on surging volume and open interest, a definitive up trend will probably be tested with a measure of two-sided volatility today. Gold prices were likely held back overnight by disappointing Indian gold demand news after the country reported its 2022 gold imports declined 34% from year ago levels and reported a 79% month over month decline in December imports. Obviously, lingering slowing from Covid, a very weak Indian currency and a global rate hike regime discouraged Indian buyers. However, according to the World Gold Council Indian gold demand is expected to rebound from pent-up demand and because of a recovering Indian economy. According to market sources Indian buyers in December were discouraged by gold prices at 6-month highs. While it is extremely difficult and might be a coin flip, predicting today’s US CPI is extremely difficult, especially given the minimal range of expectations. In other words, predicting a 0.1% change in a volatile pricing environment is fraught with peril. There does appear to be a whisper number calling for a contraction with one economist yesterday predicting a much bigger than expected contraction in consumer prices today. We favor a soft reading given lower price component readings from 2nd and 3rd tier reports over the prior 3 weeks. In fact, purchasing managers, the ISM, and the US jobs report all registered slight moderation in inflation components. As we indicated yesterday, seeing gold and silver bulls need signs that inflation is softening is a complete deviation from gold and silver price action through previous inflation periods. Nonetheless, the gold and silver bulls need a positive chain reaction of a soft CPI, which fosters weakness in the dollar, promotes strength in treasury prices which in turn lend support to equities and markets like gold and silver. In conclusion, the fundamental case favors the bull camp while technical indicators are modestly short-term overbought. Certainly, the uniform uptrend pattern in gold into the recent high should provide confidence to the bull camp going forward. However, with the rally putting February gold prices $61 above the January low, $100 above the December low and $160 above the late November low there is a scope for a moderate corrective dip. Traders intending to hold gold and silver positions long-term should consider purchasing at the money bear put spreads for a 12-hour hedge. Uptrend channel support from the November and January lows today is moderately below the market at $1,853.40 and for fresh longs we suggest waiting for a pullback to that vicinity. Obviously, the silver market has corrected its overbought condition from the beginning of the year but has continued to trade near support levels which erodes the bullish set up from the uniform and solid uptrend pattern. Given the moderate corrective setback in silver it might suffer less selling if inflation is minimally higher but given the recent breakdown in bullish sentiment, silver prices today could see a range of $1.00 today.”

On Friday gold pricing continued to impress. This latest technical success began in early November around $1650.00 and pushed to $1900.00 + today. All this bullish happiness created over just the possibility of a significant change in Fed interest rate policy.

There may be a lesson in these tea leaves. In February of 2022 gold pricing was the same as it is today ($1900.00 +). But the region between $1900.00 and $2000.00 proved to be gold’s Achilles Heel. Gold failed to hold these lofty prices and in 6 months was trading around $1650.00.

Gold’s impressive price rise this week is nicely reflected in the dollar’s renewed weakness. The Dollar Index last Friday was approaching 106.00. Over the past 5 trading days the index has lost nearly 4 full points, which is extraordinary. And highlights the change in trading sentiment which welcomes lower interest rates.

It is a bit early to assume this fundamental change is set in cement. There are too many moving parts to the equation. There is a growing sense that we may be in the early stages of an important monetary transition. One which is closer to the pre-pandemic interest rate normal. And one, hopefully, in which gold can coexist with higher interest rates. But this remains a one-of-a-kind mix of economic and political theory. Batten down the hatches and expect a volatile market.

On the day gold closed up $22.90 at $1918.40 and silver closed up $0.37 at $24.23.

Platinum closed down $10.90 at $1063.70 and palladium closed down $3.60 at $1777.50.

Zaner (Chicago) – “February gold was higher overnight, continuing Thursday’s sharp rally and trading to its highest level since May 5. Gold was supported by a slightly lower dollar, which followed Thursday’s steep selloff. However, March silver was mixed to lower and was confined to Thursday’s wide range. At times yesterday, the bull camp in gold was disappointed in the magnitude of the gains following definitively supportive US economic news from inflation and jobs-related data. However, the action in outside markets supports the case for more gains. Certainly, the Dollar Index is short-term oversold, but the market has embraced ideas of a longer-term downtrend. Furthermore, US Treasury yields declined, energy prices showed strength, and the risk-on vibe should facilitate expectations for improved physical demand for gold. December gold has regained the psychological $1,900 level but could be presented with some week-ending profit-taking. We estimate that the spec and fund net long in gold, adjusted to the highs this week, is at its highest level since last May, which could be construed as overbought. There is also the potential for corrective balancing, as the November and January uptrend channel support today is down at $1,855.30, which is well below the current market. The sharp gains in gold and the sharp declines in the dollar have been a major component of this week’s modest recovery in silver, but it continues to take direction from the level of risk-on sentiment in the marketplace, and it will likely need confirmation improvement in global prospects the equity markets. Consolidation support in March silver is $23.34. A trade above $24.28 could set the stage for a rally to $25.00.”

Brothers and Sisters, thank you for your friendship. If you have unusual circumstances, need cash or a special visit – talk to Harry or Eric. Most employees have been vaccinated – if this is a concern ask for more information. 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 get us back to normal and our traditional business model. Thank you for your patience. Richard Schwary

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