Gold – Struggling Against Rising Rates

Commentary for Friday, Sept 23, 2022 (www.golddealer.com) – Today gold closed down $25.50 at $1645.30 and silver closed down $0.71 at $18.84. Gold dipped again this morning as the dollar continued to gain strength and safe haven demand may be hiding under the bed. The two-year Treasury yield tops 4.2% (15-year high) the DOW moves below June lows. And Wall Street is not happy. Today’s weakness in the metals may also reflect the latest US economic snapshot. Which suggests our economy is growing despite higher interest rates. Negative sentiment still rules, which might suggest a short-term bottom is in place. Traders obviously fear gold’s negative technical picture, but this market turned choppy going into the weekend. With gold at 2 ½ year lows traders may look for a tired bear. The Asian physical market is already active at these lower levels. Large sellers of physical bullion are scarce at current levels, content with waiting out this interest rate storm. Last Friday gold closed at $1671.70 / silver at $19.30 – on the week gold was higher by $26.40 higher and silver was lower by $0.46.

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On Monday gold moved between $1664.00 and $1668.00 in the overnight Hong Kong and London markets. Caught a bid in early New York trading, pushing into the $1675.00 range but the minor rally was sold, and it closed virtually unchanged on the day. Here is an interesting twist. The Dollar Index lost ¾ of a point in the aftermarket, pushing gold up $10.00 ($1675.00).

Still, this market remains defensive and anticipating a large interest rate hike later this week. The latest FOMC decision will likely be released after market close on Thursday. Most traders are looking for a three-quarter point hike. Some believe there is a 20% chance that the Fed will move interest rates higher by a full point. The good news is that one way or the other the market will have confirmation as to how hawkish the Fed has become on the short term. The bad news that this “higher interest rate” scenario will then simply recycle.

Traders will again begin to again worry about what might be in the cards the next time around. The Fed has two “meetings” remaining on their 2022 calendar. The November 1^st and 2^nd is the less important of the pair. But these days any small piece of information may confirm preconceived ideas. So, a minor press release or public comment can create trading waves.

Their last meeting of the year, and the most important is called – “Meeting associated with a Summary of Economic Projections”.

Here everyone will get a personal look at what Chief Powell thinks and his observations relative to the most current inflation data. This last meeting of the year will give the trade a much better confirmation as to his intention. Keep in mind the public is expecting and has factored a hawkish response into the metals trade. If they get anything less, it would be bullish for the metals.

The key to current pricing is the realization that change always happens and is rarely successfully anticipated. Reuters “Just months ago, investors worried the Federal Reserve was not fighting inflation aggressively enough. Several jumbo rate hikes later, some now fear the Fed will plunge the economy into recession by tightening monetary policy too quickly.”

In the meantime, people are thinking about downside in gold and silver bullion. As opposed to higher prices on the short term. This is unfortunate because it creates a “doom and gloom” environment. When in fact selling prices of the metals are at their most attractive in years. Still, it is difficult to get excited over lower prices in the metals. But the rhetoric overshadows the truth.

The fact is that in our corner of the world, the public has no problem buying in a significantly down market. And I’m fond of reminding everyone that there are few large sellers. This is an often overlooked but almost universally true aspect of the physical market.

I am sure there are times in our 40 years of service that we were not net sellers, but these times are rare. There are exceptions but generally the public buys and keeps for the long term. This is especially true for certain ethnic sectors of the large LA marketplace.

On the day gold closed down $5.50 at $1666.20 and silver closed down $0.03 at $19.27.

Zaner (Chicago) – “Gold was weaker overnight, and the market seemed to be willing to press Friday’s lows coming into the session this morning. With the path of least resistance in interest rates and the dollar pointing upward, the path of least resistance in gold and silver remains down. The fear of a jumbo (75-basis point) US interest rate hike on Wednesday has been factored consistently since the previous FOMC meeting, and we suspect the trade is pricing in expectations of the Fed opening the door to the next rate hike. Friday’s COT report showed a minimal decline in the fund net long position, but since the report was measured, gold has declined $50, which suggest net short may have grown to its largest since mid-2019. On the other hand, even with a moderately oversold technical position, the bull camp lacks a credible argument for the market putting in a low. The Commitments of Traders reports showed managed money traders were net sellers of 11,349 contracts of gold for the week ending September 13, which moved them from a net long position to a net short of 10,132. Non-commercial & non-reportable traders were net sellers of 3,341, reducing their net long to 109,546. About the strongest argument for the bull camp is the oversold status, but it is also possible that gold could forge a temporary relief rally after the Fed decision has been released. If in its statement the Fed acknowledges some success against inflation, that could extend the “buy the rumor” recovery further than would be expected from a market without strong fundamental support. The silver market on the other hand has recently posted a spec and fund net short position and has shown periodic divergence with gold. With silver falling 50 cents since the COT data was collected, it likely enters the week with a spec and fund short net short. However, fear of recession, negative spillover from gold price action, and a higher dollar leave the bears with significant ammunition. The COT report showed managed money traders were net sellers of 17,173 contracts on the week, increasing their net short to 7,459. Non-commercial & non-reportable traders were net buyers of 8,360, which moved them from a net short to a net long of 4,051 contracts.”

On Tuesday gold traders sold yesterday’s stronger aftermarket in typical fashion as paper traders continue to “buy the dips” and “sell the rallies”. Today’s aftermarket recovered most of today’s loss and I suspect will again be sold in the morning. The coming FOMC interest rate hike just can’t seem to get out of the headings and will be used by those with a trading agenda. Fear of coming interest rate hikes is so old news that you would think a good rumor (true or not) would pop up from time to time. But no chance these days, the bears just keep banging away at those awful Fed interest rates and the calamity that is supposedly right around the corner.

Which makes me wonder if the doubters are as convinced as they sound. Considering recent declines, I would suggest that whatever the Fed does this week will be less dramatic than the bears claim. And the bulls will come out from under the bed taking advantage of lower prices. Especially if the physical dealer has quality deliverable product.

This cause-and-effect step-down in prices has been in play since higher interest rates took the sizzle out of the physical market. And it works in reverse just as easily. The cause-and-effect of a step-up market will create dramatic price increases as soon as the wider inflation driven market realizes that not having gold and silver bullion is no longer an option.

On the day gold closed down $6.50 at $1659.70 and silver closed down $0.17 at $19.10.

Zaner (Chicago) – “The precious metals markets are staying clear of their recent lows, but they are having trouble regaining upside momentum, even with the late rebound in global risk sentiment yesterday. They may have to wait until the FOMC meeting is out of the way before they can make a recovery move. Both gold and silver were able to rebound from heavy early losses yesterday, but they could not hold onto those gains and finished in negative territory. The prospects for a 75-basis-point rate hike at Wednesday’s FOMC meeting continue to weigh on the markets, but the chances for a 100-basis point hike appear to be receding. At this point, the chances remain for three more rate hikes this year, and that has made it difficult for gold and silver to sustain upside momentum. But the oversold condition of the market sets it up for a “buy the fact” rally after Wednesday’s announcement, and if the Fed appears to be softening its tone in the post meeting comments, the rally could sustain longer than just an initial reaction. However, it is hard to build a long-term case for the bulls when the Fed seems willing to risk recession to stop inflation. Platinum – It’s possible the PGMs could benefit from the rebound in global risk sentiment on ideas it would encourage light vehicle sales and paint a rosier picture for auto catalyst usage. The dollar’s inability to take continue to make new highs may spark a pullback in reaction to the FOMC meeting, which could help platinum and palladium maintain their recent upside momentum. The COT report showed both markets with generally balanced spec positions, and they could benefit from stronger global risk sentiment.”

On Wednesday gold opened firm as Russian President Putin called up 300,000 reservists to fight in the Ukraine. And said Moscow would respond with the might of all its vast arsenal if the West pursued its “nuclear blackmail” (Reuters). Biden was soon talking to the public disputing Putin’s claims and again suggesting that it was the world’s responsibility to support Ukraine’s independence. The rhetoric on both sides was strong enough to rekindle safe haven buying and pushed the price of gold as high as $1675.00. But traders sold this early rally, gold moved into the red and traders were again hunkered down over today’s interest rate hike.

Fed Chief Powell then publicly explained the reasoning behind the FOMC’s 0.75% rate hike and assured everyone that the Fed remains committed to bring down rising inflation. He also confirmed the FOMC plans for further reductions in the balance sheet.

Jerome’s feared hawkishness front and center, and the Dollar Index making daily highs (111.0) traders awaited the predicted collapse in gold prices. And then, out of the blue the aftermarket caught a bid pushing gold towards $1690.00 up $27.00. Still, even this bit of sunshine was short lived as traders “bought the rumor” and “sold the news”.

It’s possible that traders were expecting a full point interest rate increase in an oversold market and these higher prices will be called a “relief rally”. The Chief would not speculate on recession but suggested the chance of slower growth is likely.

Which may hint the Fed wants the option to be less aggressive. Perhaps stretching out their higher interest rate plan well into next year. But this seems unlikely as the FOMC is already being publicly criticized for repeating the past mistake of getting behind the inflation curve.

It is possible the latest Russian aggression is being underestimated. And regional safe haven demand is just surfacing. This coupled with an oversold market creates an interesting scenario.

Still, it is too soon to read much into this unexpected strength. It may evaporate by the end of the week. But it does hint that “higher” or “lower” gold is not completely dependent on short-term interest rates. Which may be a great first step at higher gold and silver prices.

Stay tuned, “the plot thickens”. A great and old expression which comes from a satirical play called The Rehearsal, written by the poet George Villiers, in the year 1671.

On the day gold closed down $6.50 at $1659.70 and silver closed down $0.17 at $19.10.

Zaner (Chicago) – “The trade is anticipating the FOMC’s meeting announcement this afternoon, and with an oversold technical condition and Putin announcing a “partial military mobilization,” the market may be in for some short covering after the FOMC results are released. December gold has been consolidating in a narrow range near contract lows as the world largely expects another 75 basis-point rate increase. Higher rates make it less attractive to hold non-interest-bearing assets like gold, and the strong dollar pulls safe-haven demand from gold as well. Investment interest in gold continues to decline. ETFs lowered their gold holdings another 202,578 ounces on Tuesday, down 0.2% on the day and a third straight day of declines. Fund traders have also abandoned their long bets. The Commitments of Traders managed money position has fallen from 175,694 contracts net long in March to a modest net short of 10,474 recently. This could be setting the market up for a bounce after the rate hike is announced. Anything less than a 75-basis point hike would likely spark a bullish reaction, but even if the Fed meets expectations, it may only hold the market down for a brief time. A lot of traders think it is already baked in. If the Fed sounds at all optimistic, a rally may be more sustaining. On a positive fundamental note, China’s imports of non-monetary gold reached their highest levels since June 2018 last month. But despite the oversold status, it is hard to build a case for more than a short-covering rally. Unlike gold, December silver has rejected its September 1 contract low with a modest short covering rally. It has been hugging trendline resistance since Monday, and that line falls to $19.537 today. A bullish reaction to the FOMC meeting could spark a move through resistance and a more substantial rally. The market is short term overbought, however.”

On Thursday gold’s early morning strength ($1685.00) is again brushed off as either “transitory” or mild weakness in the dollar by analysts fearing higher interest rates. The mindset of most traders remains fixed on the notion that higher interest rates mean lower gold and silver prices. I am not a raging bull this early into the “higher interest rate game” and with negative sentiment rising we could see lower prices. But I would also like to acknowledge that there may be ether viable scenarios, waiting on the sidelines for markets to settle.

Most of these are well known but rarely cited these days because professional traders believe in the supremacy of the dollar to world trade. Which makes sense, but an overbought dollar should not be overlooked considering investors look to the dollar as an unequalled safe haven during these troubling times. And higher interest rates reinforce this well thought out perception.

It is a misconception however to believe the dollar must collapse before gold becomes supremely important. I’m not a big fan of the “end of the world” scenario. There are many good reasons to own gold and silver bullion besides relative pricing.

But it makes good sense to me to look critically at our overbought dollar. And expect the good old American greenback to lose value as the Fed deaccelerates this overheated economy. I have run these numbers before, but they are worth remembering. This last year the Dollar Index has moved from 90.00 through 110.00, a gain of about 20%.

If the dollar only loses half of the ground gained during this massive run up the cash gold market would be looking at another attempt at $2000.00. And more importantly it would regain its massive audience which has been sitting on the sidelines wondering why gold is struggling even as inflation continues in a troubling world. The idea that gold and silver bullion are no longer viable is nonsense. There is a limit to what the Fed can accomplish with interest rate leverage. And once that “limit” is better understood today’s physical buyer will better appreciate why the informed have called gold and silver bullion real money for thousands of years.

On the day gold closed up $6.20 $1670.80 and silver closed up $0.07 at $19.55.

On Friday gold once again weakened as the Dollar Index approached an amazing 113.00. The obvious conclusion is that many believe the Fed may will continue with its sledgehammer approach to rising inflation. Today’s drop is a bit surprising however considering Putin’s talk of war as the EU continues to push for further Russian sanctions. Reuters – “Russia launched referendums aimed at annexing four occupied regions of Ukraine, raising the stakes in the seven-month-old war with what Kyiv called an illegal sham that saw residents threatened with punishment if they did not vote.”

From a practical standpoint our order phones began ringing early in the day and were steady most of the day. The public committed to physical ownership of bullion are buying. We continue to be net sellers both in delayed delivery and live product. The smaller the bullion coin the larger the premium from the manufacturer, but the public remains interested. The best value remains in the larger bullion coins and bars, but live availability remains sketchy. Which supports my contention that there is a clear difference between the paper and physical market.

The 30-day pricing chart in gold will give you a good idea of recent relative support levels. In early September gold held up well around 1700.00. By mid-September that support floor looked like $1650.00. A level which has been tested three times, suggesting a solid holding pattern if such a thing is possible in light of this negative sentiment.

On the day gold closed down $25.50 at $1645.30 and silver closed down $0.71 at $18.84.

Platinum closed down $47.30 at $858.50 and palladium closed down $104.30 at $2056.40.

Zaner (Chicago) – “The US dollar was higher again overnight, as the December Dollar Index reached a new contract high, and the nearby chart reached its highest level since May 2002. December gold fell below Wednesday’s post-meeting low and could be on course for another leg down. Gold is technically oversold, and traders have been weighing this against prospects for rate hikes to extend into 2023. US Treasury markets collapsed yesterday and extended those losses overnight. This means higher long-term rates, which pulls investment away from non-interest-bearing assets like gold. US initial and ongoing jobless claims came in lower than expected on Thursday, and the KC Fed manufacturing index showed a surprisingly large recovery, back into positive territory. This gives the Fed even more leeway for raising rates. Investment interest continues to drain from gold. Bloomberg reported that ETFs reduced their gold holdings by 214,124 ounces on Thursday, for their fifth straight decline and their biggest cut since July 18. They also cut silver holdings by 1.5 million ounces. With the dollar making new highs and the Fed determined to push rates higher, it is hard to build a bullish case for gold. Even a short covering rally seems elusive. Increased tension over Russia could be a spark some safe haven buying, but that has not happened yet.”

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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