Gold – Are Recent Highs Sustainable?

Gold – Are Recent Highs Sustainable?

Commentary for Friday, December 9, 2022 (www.golddealer.com) – Today gold closed up $9.40 at $1798.10 and silver closed up $0.48 at $23.54. Gold opened typically choppy in the early trade and initially sold off ($1792.00) in the face of rising Treasury yields. Traders were caught off guard however when gold bounced off daily lows and quickly moved to monthly highs ($1805.00). I suspect early weakness in the Dollar Index (104.4) encouraged the bulls but if the index is now oversold it might suggest recent gains are capped into next week. Last Friday gold closed at $1795.90 / silver at $23.04 – on the week gold was up $2.20 and silver was higher by $0.50. Surprisingly tight trading ranges considering the growing uncertainty.    

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On Monday gold moved lower in a familiar trading pattern based on dollar strength. The New York cash market was typically volatile, dropping from $1800.00 highs in the early trade through $1773.00 before the paper trade bought the weakness between $1770.00 and $1775.00. And the market settled off lows on the day but remains jittery.

This sudden drop in the price of gold was caused by two factors. First, the price of gold was higher by more than $100.00 this past month, profit taking is always a consideration because paper traders are experts at sensing the end of the momentum play.

Second, there is a possibility of a bullish reversal in trading sentiment. We have seen this several times before as analysts embrace the less hawkish Fed. And then wonder if they are on the right side of this quickly changing interest rate environment. The latest hot jobs number was all it took to suggest the Fed has less room to maneuver on interest rates, especially in the short term.

For the time being get used to “indecision” being part of the trading picture. This kind of “shifting-sand” trade is seen by looking at the weekly US Dollar Index. Since last Wednesday an oversold dollar bounced higher, squelching the latest rise in gold on three separate occasions.

Each time the generally lower trend prevailed, and the index moved lower. The good news is that the trade bought the mild dip, the bad news was that prices then continued lower on the day.

This reminds everyone that regardless of what the Fed says, they are subject to economic factors which may be outside their control. Expect continued volatility as the FOMC struggles with fundamentals. How hawkish do they have to be in the short term to control inflation (a prime concern) and not contribute to the growing fear of recession? Uncertainty is again rising, and if it continues short-term information gets the most attention. The upcoming US Consumer Price Information (CPI) due December 13^th is a prime example and will be closely watched.

On the day gold closed down $28.50 at $1767.40 and silver closed down $0.84 at $22.20.

Grant on Gold (Zaner) – (1) Gold rose 2.5% last week, trading above $1800 for the first time since July. (2) Silver notched nearly an 8% gain last week. (3) Platinum posted a 10.3% gain last week. While some pressure has emerged more recently, the market is holding gains above $1000. (4) Palladium continues to trade in the lower end of its well-defined range.

On Tuesday gold in the domestic trade displayed continued uncertainty. But pricing does seem to have modest underlying strength. The pricing spread moved between $1780.00 through $1768.00. A relatively tight trade with a mild upward bias. This kind of pricing is likely the combination of short covering and a small bounce from yesterday’s oversold condition.

Gold remains south of the confidence building $1800.00 + mark. And traders may be reconsidering their recently adopted dovish FOMC outlook in light of problematic inflation.

This still looks like a “wait and see” moment. (Reuters) – “With the Fed due to meet next week, the direction of prices is likely to be determined on how the U.S. central bank sees the glide path for future rate rises,” said Michael Hewson, chief markets analyst at CMC Markets.”

On the day gold closed up $1.90 at $1769.30 and silver closed down $0.08 at $22.12.

Enough of the “on again – off again” scenario. We all need a great feel-good story about gold and the latest from Saxo Bank is perfect! This from Neils Christensen (Kitco) – Outrageous! “Global economic uncertainty and heightened geopolitical tensions will create a “worldwide war economy” that prioritizes domestic supplies and price caps, ensuring that inflation will remain persistently high through 2023. Taken to its extreme, this scenario will be very good for gold, with Saxo Bank offering an “outrageous” forecast of $3,000 an ounce. “2023 is the year that the market finally discovers that inflation is set to remain ablaze for the foreseeable future,” Ole Hansen, head of commodity strategy at the Danish bank, said in the report. In an interview with Kitco News, Hansen added that his price target is not an official forecast, but more of a thought experiment on what happens if extreme scenarios in the global economy unfold. “It’s not so much about being right but starting a discussion on the challenges the global economy faces and how that will impact gold,” he said. “Fundamentally, a war economy is inflationary, and we expect investors to realize in 2023 that central banks are not going to be able to keep inflation under control.” Hansen said that if inflation remains persistently high, investors will be forced to reevaluate breakeven rates. Any drop in real rate expectations should weaken the U.S. dollar.

Hansen added that gold has been lackluster through most of 2022 as investors continue to have faith that central banks will be able to bring inflation back to 2%. However, he added that 2023 is the year that faith could be shaken. Hansen said that they see a few scenarios that continue to support higher-for-longer consumer prices, including further development of domestic supply chains, with a particular focus on the energy sector. A second factor is an improvement in China’s economy, which would lead to broad-based demand for raw commodities. Not only is the Fed expecting to end its tightening cycle early in 2023, but Saxo Bank said that the threat of a global recession will force central banks to pump liquidity back into global financial markets.

These three scenarios taken to the extreme are what would drive gold prices dramatically higher, Hansen said. “Gold slices through the double top near USD 2,075 as if it wasn’t there and hurtles to at least $3,000 next year,” he said. Although inflation has fallen from its summer highs, it remains persistently high even as the Federal Reserve prepares to slow the pace of its aggressive monetary policy tightening. Markets expect the U.S. central bank to raise interest rates by 50 basis points at next week’s monetary policy meeting, and they continue to see the Fed Funds rate topping out between 5.00% and 5.25% in the first half of next year. As well as being an inflation hedge, Hansen said that gold will also remain an attractive asset for nations looking to further reduce their exposure to the U.S. dollar. In another “outrageous prediction”, the Danish bank sees the U.S. dollar losing its relevance next year as a global reserve currency with nations like China and India and organizations like OPEC+ dealing amongst themselves. “Recognizing the ongoing weaponization of the USD by the U.S. government, non-US allied countries move to leave the USD and the IMF to create an international clearing union (ICU) and a new reserve asset, the Bancor (currency code KEY), using Keynes’ original idea from the pre-Bretton Woods days to thumb its nose at the practices of the U.S. in leveraging its power over the international monetary system,” said Redmond Wong, Saxo Bank market strategist for Greater China in his report. Wong noted that currently, 20% of international trade is destined for the U.S.; at the same time, more than a third of international trade is invoiced in U.S. dollars and nearly 60% of global foreign exchange reserves are held in U.S. dollars. “A natural solution for China and its many trading partners, particularly energy and other commodities exporters, would be to find a new non-national currency reserve asset upon which to trade,” he said. This new global currency would result in non-aligned central banks cutting their U.S. dollar reserves, U.S. Treasury yields soaring and the greenback falling 25% versus a basket of currencies.”

On Wednesday gold opened choppy with a positive bias, and quickly moved higher ($1788.00) before the paper trade sold the rally and prices settled midrange. That was the bad news, the good news – the market gathered itself and once again moved to highs on the day. This trade looks like it is trying to recover from losses early in the week as the Dollar Index settles from daily highs and the 10-year bond yields dip to 3-month lows.

The gold market will also focus on next week’s November CPI (Consumer Price Index). The last Fed meeting of this year will also be next week, the 13^th and 14^th of December. The jury is out as to the outcome, the bulls are hoping for a half point hike, the bears (and the short paper trade) suspect a full point might still be in the cards if the Fed decides to fight stubborn inflation.

(Reuters) – As the Fed plans to ‘raise and hold,’ new projections may show the cost – Coupled with an only modest decline in inflation so far, new projections from the Fed’s 19 policymakers are likely to show rates continuing to rise and to remain elevated through 2023, countering current market expectations for rate cuts by the end of next year. “The Fed has been telling us that getting unemployment higher and wage growth lower is going to take a prolonged period of restrictive policy, and today’s data provides more evidence to that effect,” wrote Jefferies economist Thomas Simons. “This does not take the Fed off track for the widely expected 50 (basis point) rate hike at the upcoming…meeting, and it gives us greater confidence in our expectation that the terminal rate will top 5% next year.”

On the day gold closed up $16.20 at $1785.50 and silver closed up $0.59 at $22.71.

On Thursday gold was typically choppy, trading between $1795.00 and $1786.00 with a mild upward bias supported by a weaker dollar. The Dollar Index moved from highs (105.4) through lows (104.8). Enough to support gold prices at current levels. Today’s weaker index reflects lower Treasury yields as Wall Street expects the Fed to be less hawkish through next year.

Tomorrow traders will look at November’s Producer Price Index, but it will likely come in as expected and create little change in sentiment. There is buzz about China easing its restrictive Covid requirements. Not a new idea but apparently they are ready to move forward. The theory here is that with less or perhaps no restrictions their massive economic engine will fire up quickly and also create fresh physical buying in gold and silver bullion.

I’m not keen on this idea because China’s hand in the physical metals business has always been a kind of subterfuge. There is also the growing notion that Russia may trade oil for gold. Both innovations are driven by the idea that China and Russia will challenge dollar hegemony.

This really is fringe thinking, but you never know in these transition days. And the bullish gold and silver scenario could use a fresh shot in the arm as it struggles against higher interest rates.

On the day gold closed up $3.20 at $1788.70 and silver closed up $0.35 at $23.06.

Zaner (Chicago) – “In retrospect, traders might have been too quick to conclude that the Fed is softening its rate stance. That seemed to be on traders’ minds earlier this week with the recent pattern of strong US economic data. Furthermore, with very critical inflation news expected from China tonight and the US PPI report on Friday morning the markets are likely to get fresh direction of Fed policy. Obviously, with Bonds and Notes trading up to their highest levels since September on Wednesday, the markets continue to signal that the Fed will pare back its rate increase to 50 basis points this month after a series of 75-bp hikes earlier this year. In the end, with the subject of tempering tightening in the marketplace today’s jobless claims will take on added importance for gold. Gold and silver benefited from a weaker dollar on Wednesday, but the Dollar Index has held above Monday’s lows, and it would probably take a trade below there to support a stronger rally for gold. The Peoples Bank of China added to their gold holdings for the first time in three years in November, which is fundamental bullish factor if this is the start of a new trend. Reports are that the Chinese central bank is attempting to diversify away from the dollar, but we suspect the Chinese central bank has been adding consistently to its gold reserves secretly on-and-off for years. We base the view they are dramatically raising their holdings as US gold reserves are reportedly 8,133 metric tons which is more than 4 times Chinese central bank gold reserves holdings of 1948 metric tons. Their gold holdings increased to 63.67 million ounces from 62.64 million previously. The World Gold Council noted that the world’s central banks purchased nearly 400 million ounces during the third quarter. Unfortunately for the bulls, the technical picture is shaky, as Monday’s rally above the November high was met with lower volume and open interest and divergence with momentum indicators. Both gold and silver could have a difficult time avoiding back-and-forth action until the PPI report on Friday is known.”

On Friday gold closed above 30-day highs which is impressive. Still the notion of an aggressive FOMC in the coming months threatens rising bullish sentiment. I would call this another week for investors to decide whether the optimism glass is half full or half empty.

I’m delighted that gold is more than hanging in there. New recent highs always get attention. And this small amount of newfound optimism is growing in spite of rising interest rates.

If you look at the 3-month Dollar Index pricing still looks technically weak. These past 3 months the index has moved from 115.00 through 105.00, putting a smile on the Walled Street. With smart money betting on even lower Treasury yields I suspect the index will continue its wobbly descent, which was one of the reasons the price of gold made recent highs today.

There are other factors at play which are not as obvious. Somewhere in this unwinding mess there must be renewed interest in safe haven demand. Perhaps from China or India. Perhaps the result of new and massive Ukraine shelling by the Russians. Coupled with demands from Moscow relating to the EU.

I don’t think this stew is thick enough to seriously challenge rising interest rates in the short term. But we may be entering an interesting phase which suggests gold and silver can move higher even when competing against rising interest rates.

On the day gold closed up $9.40 at $1798.10 and silver closed up $0.48 at $23.54.

Platinum closed up $21.60 at $1049.20 and palladium closed up $38.00 at $1946.40.

My 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. As always, thank you for your patience. Richard Schwary

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