Gold – An Interest Rate Dilemma
Commentary for Friday, October 6, 2023 (www.golddealer.com) – Today gold closed up $13.60 at $1830.20, and silver closed up $0.69 at $21.54. Will the Fed raise interest rates again in November and keep them elevated for a longer period? The Wall Street Journal offers a contrary opinion – the chances of that rate increase are going down because of an unstable bond market. At the same time the latest US nonfarm payrolls came in hot this morning. Our economy is strong, offering the Fed a good reason to push interest rates higher in the battle against inflation. This is another one of those pesky details which often throws a monkey wrench into commodity trading. It is difficult to argue against the notion that higher interest rates have created generally weaker prices in both gold and silver. Trying to fathom what the Fed might do given these opposing forces will require a great master at reading the tea leaves. Or perhaps a genuine mystic. Enjoy a quiet weekend. Last Friday gold closed at $1848.10 / silver at $22.24 – on the week gold was down $17.90 and silver was off $0.70.
Please note that FedEx is no longer asking for delivery signatures. They are scanning IDs. We have complained to FedEx, but they remain resolute. Scanned identification is safer, but if you have a problem with this decision, please make your feelings known to FedEx. Unfortunately, the present delivery time for the USPS alternative is 2-3 weeks.
Should you decide to use our Delayed Delivery Program please talk with your service rep and understand how this program works. It is handy if you want to lock in the price “now” and insist on a new product – but is not for everyone. Just like us – you must pay upfront to “lock in” prices and you can’t “change” your mind. So, unless God has blessed you with patience, please ask your rep for other options and thank you for understanding.
On Monday the bullish hopefuls were looking for some kind of short-term relief from falling gold prices. But this was not to be as analysts are waving the red flag – fearful of higher, and continued interest rate hikes by an aggressive Fed.
This already hot trade was further encouraged by a stronger dollar. The Dollar Index this morning moved from 106.00 through 107.00 before settling only modestly lower on the day.
Could this be an overreaction? It’s possible if you are an optimist, but this group of stalwarts is getting smaller. Still, Chief Powell in true form will take the time necessary to make sure his “option” ducks are all in a row. Which suggests another “wait and see” moment.
In the meantime, the power of momentum and speculation weigh heavily on the metals.
The pricing conversation that not too long ago was discussing $1900.00 must now reckon with whether gold will hold the precarious $1800.00 support.
As usual, patience in these downward swoops will likely prove rewarding. But keep your eye on the prize, the goal in any event is to own physical metal. Gold and silver bullion provides a degree of independence because it works as a financial asset which is outside typical government control. A handy aid in times of trouble, in case this grand experiment goes off the tracks.
Reuters (Ashitha Shivaprasad) – Gold extends fall as strong dollar, higher US rates take toll – “Gold extended its decline for a sixth straight session on Monday to hit a near seven-month trough, as a robust dollar and prospects of higher U.S. interest rates took the shine off bullion. “There is a reckoning that interest rates are going to be higher for much longer, which has been the bearish element in the precious market. Gold prices could go below $1,800 in the near term,” said Jim Wyckoff, senior analyst at Kitco Metals. “Trends in the currency markets tend to be stronger and longer lasting. The appreciation of the U.S. dollar may not end anytime soon, pressuring the gold market.” The U.S. dollar (.DXY) rose 0.6%, making bullion less attractive to other currency holders. Traders are pricing in a 55% chance that the Federal Reserve will leave interest rates at the current range of 5.25%-5.50% this year, according to CME’s FedWatch tool. Federal Governor Michelle Bowman said she remains willing to support another increase in rates if incoming data shows progress on inflation is stalling or proceeding too slowly. Fed Vice Chair for Supervision Michael Barr, however, said rates are “at or near” sufficiently restrictive level. Since powering above the key $2,000-per-ounce level in early May, gold prices have fallen more than 11%, or $230, pressured by a sharp rise in benchmark U.S. Treasury yields, which makes the non-yielding gold less attractive. “The buying on dips (in gold) by central banks is now conspicuously absent,” said Tai Wong, a New York-based independent metals trader. The market focus now shifts to job openings data, private hiring numbers and U.S. nonfarm payrolls over the course of the week.”
On the day gold closed down $18.10 at $1830.00, and silver closed down $1.02 at $21.22.
On Tuesday gold was still in a downtrend but the drop in prices was not as extreme, so the avalanche of lower prices may have abated in the short term. The dollar remains strong, as the Dollar Index has moved nearly two points higher since last Friday.
The bulls are sidelined. But the bears also have their problems in that gold pricing may now have to deal with an oversold market. And the Fed has its own set of problems, even though they seem resolute about higher interest rates, even into next year. With the bulls, the bears and the Fed at war with each other and often times playing on both sides of the street the gold trade presents a high degree of risk to all concerned.
The dollar could correct lower (not likely but possible) providing the bulls shelter at these lower prices. And while the bearish scenario is most popular these days, they are not without risk because these lower prices always create bargain hunting. Finally, this phase of the uncoupling offers all concerned an ideal opportunity to switch sides without warning.
Reuters (Ashitha Shivaprasad) – Gold down for 7th day on higher dollar, yields; US jobs data eyed – “Gold prices languished near a seven-month low on Tuesday, weighed down by a robust dollar and elevated bond yields as the likelihood of U.S. interest rates staying higher for longer dominated sentiment. U.S. job openings unexpectedly increased in August, pointing to tight labor market conditions that could compel the U.S. Federal Reserve to raise interest rates next month. “The JOLTS report has surprised the market as it raises prospects of another hike but also lowers expectation of a slowdown in the U.S. economy, pressuring precious metals,” said Edward Moya, senior market analyst at OANDA. Gold is considered a hedge against inflation and economic uncertainties. But higher interest rates raise the opportunity cost of holding bullion, which is priced in dollars and does not yield interest. Gold prices briefly ticked up earlier in the session as the dollar sharply weakened against the yen, just moments after briefly rising above 150 for the first time since October 2022, signaling a possible intervention by the Bank of Japan. “If the Bank of Japan intervenes, it could weaken dollar in the short term and provide some support to the precious metals,” Moya added. The market focus is now on September nonfarm payrolls data due on Friday. “We reiterate our 12-month target of $1,725 per ounce and remain cautious on gold,” said Julius Baer analyst Carsten Menke.”
On the day gold closed down $5.20 at $1824.60, and silver closed down $0.04 at $21.18.
On Wednesday the downward trend in gold slows as the daily price loss diminishes. And today’s aftermarket was higher by $5.00 for the first time this week. Perhaps suggesting interest in bargain hunting or a mild short-covering rally. This kind of oscillation is typical of a market in transition. Still, I don’t see a gold turnaround, but perhaps a hint at stabilization. For the gold scenario to get that needed boost the FOMC must become friendly before the holiday season.
This is true because our economy seems to be adjusting to higher interest rates. This in turn gives the Fed more room for experimenting with their much sought after soft landing.
I am not a big fan of predicting recession because economists claim the definition of “recession” is difficult to pin down. Your best shot is to prepare for that continued slowdown, if rates move higher and hope that it passes by unnoticed, at least in your neighborhood.
Reuters (Harshit Verma) – Gold edges up as dollar slips after US jobs data – “Gold held near a seven-month low on Wednesday, while palladium slipped to its weakest level since late 2018, as a sell-off in the U.S. bond markets lifted yields after economic data raised worries that interest rates will likely remain high. Data on Tuesday showed U.S. job openings rose unexpectedly in August, pointing to a still-tight labor market that could lead the Federal Reserve to raise interest rates next month. The benchmark U.S. 10-year bond yield scaled fresh 16-year highs, while sentiment in wider financial markets also remained weak as the bond rout continues. Gold has shed more than $100 in the past two weeks as bets for higher-for-longer U.S. interest rates dented the zero-yielding asset’s appeal and partly overshadowed its traditional safe-haven role. A fall below $1,800 is likely, if the narrative that the Fed will keep interest rates higher for longer continues to gain traction, said ActivTrades senior analyst Ricardo Evangelista. Meanwhile, Fed officials consider rising long-term Treasury yields as evidence their tight-money policies are working. Markets are pricing in a 44% chance of another 25-basis-point rate hike this year, according to the CME FedWatch tool. The investor focus remains on U.S. non-farm payrolls data on Friday for cues on the Fed’s rate hike path. “Asia’s retail gold demand should rebound October-February and central banks continue to add to gold reserve holdings, which should be supportive for markets over a 6-12 month horizon,” analysts at Citi Research said in a note.”
On the day gold closed down $6.10 at $1818.50, and silver closed down $0.22 at $20.96.
On Thursday the price moved back and forth between $1812.00 at $1822.00 so the rate of decline seems to be slowing, as noted on Wednesday. This is also true for silver. It is difficult to say how traders will react here in the short term because bearish sentiment is still building. And helped along by a bearish technical picture and a hawkish Fed.
My guess in the short term is that gold and silver will continue to settle lower, but that is just a guess. There are too many variables. That is the bad news, the good news is that even the mighty Fed will soon be forced to make a problematic decision. And it’s my feeling that their November rate hike may be the Fed’s infamous Rubicon.
The phrase “crossing the Rubicon” is an idiom that means “passing a point of no return”. Its meaning comes from an allusion to the crossing of the river Rubicon by Julius Caesar in 49 BC, a fateful mistake that led to a civil war and the end of the Roman Republic.
If you are still bullish on gold or silver, especially in the longer term, current prices are low enough to see early bargain hunting. If you think this market has more downside, holding cash in the short term may not be a bad idea. As usual patience is a virtue.
Reuters (Harshit Verma) – Gold steady as bond yields ease with focus on US jobs data – “Gold prices held steady on Thursday as Treasury yields pulled back from 16-year highs and investors awaited U.S. jobs data for more clarity on the Federal Reserve’s interest rate path. Gold on Wednesday posted its worst losing run since 2016, dropping for an eighth straight session, as the likelihood of U.S. interest rates staying higher for longer weighed on sentiment. Echoing investor demand, SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund, said its holdings fell to its lowest since August 2019 on Wednesday. “Over the past few weeks gold really took a tumble, the big driver for that appears to be the rise in long term US interest rates,” said Edward Gardner, commodities economist at Capital Economics. The benchmark 10-year bond yield slipped after data on Wednesday showed U.S. private payrolls increased far less than expected in September. Markets now look forward to U.S. weekly jobless claims data and September’s non-farm payrolls report on Friday which is expected to show that employers added 170,000 jobs. Traders are pricing in around a 37% chance of another rate hike from the Fed this year, according to the CME Fedwatch tool. Gold is highly sensitive to rising U.S. interest rates, as these increase the opportunity cost of holding it. “As we get towards the end of this year, we do think that the price of gold will appreciate next year and in our view that the Fed will cut interest rates by more than markets currently anticipate,” Gardner said.”
On the day gold closed down $1.90 at $1816.60, and silver closed down $0.11 at $20.85.
On Friday the New York cash market was worth a closer look considering all the confusion about what the Fed might or might not do with interest rates. The domestic trade opened steady, dipped to lows on the day ($1810.00) and then steadily moved higher on three separate occasions, reaching $1835.00. This may not look like a big deal, but it suggests the paper trade may not breach $1800.00 support. And in fact, is closing out short positions and perhaps even bargain hunting. Look for continued volatility but this may become a plus for the bulls.
Reuters (Ashitha Shivaprasad) – Gold slides as dollar, yields rise after strong jobs data – “Gold prices fell on Friday after strong jobs data pushed the dollar and Treasury yields higher, while raising expectations that the market remains strong enough for the U.S. Federal Reserve to keep interest rates higher. The Labor Department’s report showed non-farm payrolls increased by 336,000 jobs in September on a monthly basis, against expectations of 170,000 additions, according to a Reuters poll of economists. “It is going to be difficult for gold to find traction in this higher interest rate environment. There will be areas of technical support for prices once Treasury yields retrace,” said David Meger, director of metals trading at High Ridge Futures. Benchmark Treasury yields edged higher and the dollar index (.DXY) rose 0.4%, denting appeal for gold. Traders are pricing in around a 29% chance of another rate hike from the Fed this year, according to the CME Fedwatch tool. Higher interest rates increase the opportunity cost of holding bullion. “If gold can hold the $1,805-$1,810 range today, then we should get a good bounce,” said Tai Wong, a New York-based independent metals trader.”
On the day gold closed up $13.60 at $1830.20, and silver closed up $0.69 at $21.54.
Platinum closed up $18.90 at $871.10, and palladium closed up $18.40 at $1164.20.
Jim Wycoff (Kitco) – “Technically, the gold futures bears have the solid overall near-term technical advantage. Prices are in an accelerating four-month-old downtrend on the daily bar chart. Bulls’ next upside price objective is to produce a close in December futures above solid resistance at $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 the overnight high of $1,848.80 and then at $1,850.00. First support is seen at $1,815.00 and then at $1,800.00. The silver bears have the solid overall near-term technical advantage. Prices are trending lower on the daily bar chart. Silver bulls’ next upside price objective is closing December futures prices above solid technical resistance at $23.00. The next downside price objective for the bears is closing prices below solid support at $20.00. First resistance is seen at Tuesday’s high of $21.595 and then at $22.00. Next support is seen at this week’s low of $20.85 and then at $20.50.”
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