Gold – Banking Woes – Higher Prices
Commentary for Friday, March 17, 2023 (www.golddealer.com) – Today gold closed up $50.80 at $1969.80, and silver closed up $0.76 at $22.35. The gold trade was surprised by the surge in prices today. Perhaps this is misplaced because questions about banking liquidity continue, but what makes this a confusing picture is that our central bank does not seem concerned from a liquidity standpoint. Even though the Federal Reserve has lent $300 billion in emergency funds to US banks this past week. Nearly half that money went to the initial red flags, Silicon Valley Bank and Signature Bank. But there are questions about who received the rest of the money. Biden’s response was that the government would guarantee losses at Silicon and Signature. But what about further failures? And who will pick up the tab? Widespread banking failure is not likely, the government would not allow such a thing. But who else is going to pay for this cleanup besides the American taxpayer? Last Friday gold closed at $1862.00 / silver at $20.38 – on the week gold was up $107.80 and silver was up $1.97.
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On Monday gold quickly moved above $1900.00 as the safe haven demand created last Friday by the failure of a large Silicon Valley bank continued to worry the banking community.
This second surge in the price of gold surprised me. I would have bet my 10-year-old car that today’s gold market settled, turning into a very quiet trade. One which continues to wait for more concrete information about the coming FOMC interest rates.
Today’s strong move is impressive because the price of gold has now shown its ability to set up a challenge of yearly highs ($1950.00). It reminds the faithful that gold bullion is most valued during a crisis. It should also remind us to avoid distractions. This is a classic Chicken Little story. The sky is not falling, and the Fed will not abandon its fight against inflation.
Reuters (Ashitha Shivaprasad) – Safe-haven gold accelerates as traders assess SVB fallout – “Gold raced towards the key $1,900 level on Monday, emboldened by bets that the Federal Reserve may now have to tone down its rate hikes as investors sought cover from uncertainty triggered by the collapse of Silicon Valley Bank. On Friday, gold gained 2% after California regulators closed tech startup-focused Silicon Valley Bank (SVB). Regulators also shuttered New York-based Signature Bank on Sunday. “Recent events show that gold remains a safe haven asset as it is able to benefit from market uncertainty. Also, market participants pricing out rate hike expectations is lifting gold,” said UBS analyst Giovanni Staunovo. Lower interest rates decrease the opportunity cost of holding zero-yield gold. After the SVB collapse, traders now expect the Fed to no longer raise interest rates by 50 basis points this month, in contrast to a 70% probability before the event. Rate cuts have also now been priced in by end-2023.”
The latest Reuters is a bit too optimistic in that assuming that bank failure will create a domino effect in the wider banking system. But the threat of such an event brought out President Joe to assure the public that their money was safe. Which I thought was interesting because your money really is safe even in our fractional banking system. But the fact that the President considered the SVB failure important enough to address it publicly suggests an underlying apprehension which has been created by the aggressive FOMC interest rate policy.
On the day gold closed up $49.70 at $1911.70, and silver closed up $1.41 at $21.79.
Zaner (Chicago) “While a lower low for the dollar and the lowest trade since February 16th certainly justifies strength in gold, some portion of the significant overnight pulse up move is likely to be flight to quality interest surrounding the California Bank failure. Furthermore, Goldman Sachs over the weekend predicted the Fed will not hike rates later this month because of the current stress in the financial sector! The flight to quality buying of gold and treasuries without purchases of the dollar highlights some concern of a US financial contagion but contagion is not widely feared as of this writing. It should be noted that Indian gold ETF holdings saw a record inflow last month, but that inflow was preceded by massive withdrawals over the prior 3 months. Apparently, Indian gold investors are attracted to gold now on price weakness! While the gains in gold last Friday were outsized and overdone, if the trade sees the upcoming wave of global inflation readings signaling inflation continues to rise the gains in gold could become surprising. However, both consumer and producer price readings for last month were highly divergent throughout the world with China posting soft inflation readings, Switzerland expected to produce soft producer and import prices, Spain expected to post a steady but still hot 1% month over month gain and the US is expecting consumer prices to tick down by 0.1%. The CFTC continues to catch up on its positioning reports with the delay now shortened to two weeks. Fortunately for the bull camp the net spec and fund long in gold has come down 64,000 contracts from the 2023 high and likely saw that net long decline further with the post COT position report slide of $34 into the late February low. The Commitments of Traders report for the week ending February 21st showed Gold Managed Money traders net sold 4,896 contracts and are now net long 52,457 contracts. Non-Commercial & Non-Reportable traders net sold 4,497 contracts and are now net long 145,018 contracts. On the other hand, the large range up rally last Friday was forged on the highest trading volume since November 15th of 2022, suggesting the bull camp does have some breadth. Unfortunately for the bull camp, the gold market will continue a lockstep inverse relationship with the dollar which in turn will fluctuate off fresh market assumptions on the magnitude of the next US interest rate hike. With the silver market showing significantly less upside action than gold from the May contract low on Friday, the silver bull camp is likely narrower in scope than in the gold trade. Furthermore, generally concerning global economic expectations look to leave headwinds hanging on physical commodities like silver. However, silver has seen consistent net spec and fund long liquidation action from the 2023 high spec long position registered early in January and the market has displayed some respect for consolidation support around $20.00. The February 21st Commitments of Traders report showed Silver Managed Money traders are net long 5,564 contracts after net buying 40 contracts. Non-Commercial & Non-Reportable traders reduced their net long position by 2,502 contracts to a net long 24,141 contracts.”
On Tuesday the early New York cash market for gold sold yesterday’s rally. Gold dipped below the important $1900.00 support. Traders then bought the weakness ($1896.00). The recovery was not convincing, and the bulls were disappointed that yesterday’s buzz did not repeat.
With gold higher by $100.00 these past 7 trading days it makes sense to approach this trade with caution. I do not disregard the latest rhetoric. But the claim that the banking crisis will force the Fed to halt its predictable interest rate program should be questioned.
Especially considering today’s rising Treasury yields. Crises usually support the price of gold. And it always pays to keep in mind that crisis also drives funds towards the might US dollar. Another powerful and safe choice held in high esteem by the financial community.
Reuters (Bharat Gautam) – Gold pauses banking-driven surge as bond yields rise – “Gold prices dipped on Tuesday as higher Treasury yields blunted a recent surge driven by the U.S. banking crisis, while a steady rise in U.S. inflation in February raised uncertainty over the outcome of the Federal Reserve’s policy meeting next week. Gold showed little reaction to U.S. Consumer Price Index (CPI) data, which showed CPI rose 0.4% on a monthly basis in February, as expected, after accelerating 0.5% in January. “There is nothing in the print to scare off gold bulls who’re searching for financial instability hedges at a time where the Fed may (indirectly) accept that inflation will stay higher for longer,” said Nicky Shiels, head of metals strategy at MKS PAMP SA. Traders are now largely expecting only a 25-basis-point interest rate hike by the U.S. central bank this month. Considered a hedge against economic uncertainties, gold becomes a more attractive bet in a low interest rate environment. Bullion prices rallied more than 2% in the previous two sessions as investors sought cover after the collapse of U.S. lender Silicon Valley Bank (SVB) spooked the market. “As long as the contagion risks stemming from the ongoing SVB saga remain, potentially ramping up recession risks along the way, safe-haven assets are set to remain well bid in the interim,” said Han Tan, chief market analyst at Exinity. “We expect a greater-than-even chance of spot gold staying above the psychologically-important $1,900 in the lead-up to next week’s FOMC meeting, provided that the US dollar remains subdued and risk-off mode remains in place,” Tan said, referring to the Federal Open Market Committee.”
On the day gold closed down $5.50 at $1906.20, and silver closed up $0.14 at $23.93.
Zaner (Chicago) – “With the gold market this morning sitting more than $100 above last week’s low, the net spec and fund long positioning signaling long liquidation potential and the dollar showing a minimal recovery effort early today, the bear camp has an edge until the CPI report release. From a technical perspective, traders are pointing to the significant jump in trading volume on the $100 rally over the prior 3-days and have concluded the core of the bull case in gold is strengthening. However, the gold bulls might see very temporary support from further confirmation of declining gold output from South Africa where their January gold output declined by 3.7% versus year ago readings. In another positive development gold ETF holdings yesterday saw an inflow of 73,629 ounces but remained 2% lower year-to-date. Silver also saw an inflow to ETF holdings yesterday of 584,134 ounces putting year-to-date gains at 1.2%. It should be noted that gold and silver over the last two decades have not typically benefited from a flight to quality developments, but both markets appear to be displaying bullish sensitivity to uncertainty. On the other hand, after the fear of contagion moderated and US equity markets recovered yesterday gold, silver, palladium, and platinum continued to hold their gains giving further credibility to the bull camp. Looking ahead today’s US CPI readings (combined with several other global inflation measures) could result in significant debate over the next week’s US rate hike size, hot readings could enhance limited concerns that inflation will not be contained by monetary policy and the outlook for the global economy could be downgraded significantly if global rate hikes are expected to become “large” again. Last month, US consumer prices increased by 0.5% and those type of month over month gains are clearly residually inflationary! Those with long gold and silver futures positions should seek protection against downside volatility with the purchase of April expiration put options (15 days to exp).”
On Wednesday gold bounced higher on another round of safe haven buying as European banking stocks moved into the red and customers asked questions about banking liquidity. This time around the perceived threat comes from problems within Credit Suisse. The timing here makes this latest information more problematic. The failure of Silicon Valley Bank on Monday has set the stage for those who believe a banking contagion is inevitable because of what they believe to be a reckless interest rate policy by the FOMC.
In my opinion there is a lot more huff and puff in the so called “banking failure” prophecy than anything else, but the media still loves to pounce on the sensational. In the early days of newspapers, a sensational headline (true or not) was guaranteed to increase circulation.
Reuters (Rachna Uppal) – Credit Suisse’s biggest backer says can’t put up more cash; share down by a fifth – The head of Credit Suisse Group’s largest shareholder, Saudi National Bank, said on Wednesday it would not buy more shares in the Swiss bank on regulatory grounds. “We cannot because we would go above 10%. It’s a regulatory issue,” SNB chairman Ammar Al Khudairy said in an interview with Reuters. The Saudi bank holds a 9.88% stake in Credit Suisse, according to Refinitiv data. Trading in the Swiss bank’s shares was halted late morning as they fell by a fifth to fresh record lows, having been pummeled earlier in the week in market fallout from the collapse of Silicon Valley Bank. Switzerland’s second-biggest bank is seeking to recover from a string of scandals that have undermined the confidence of investors and clients. Customer outflows in the fourth quarter rose to more than 110 billion Swiss francs ($120 billion). Al Khudairy said SNB was happy with Credit Suisse’s turnaround plan and did not think it would need more money, but also described his bank’s investment as an opportunistic one that was not time-dependent. The Saudi bank would exit when proper value to the shares had been acquired, he added. “We are happy with the plan, the transformation plan that they have put forward. It is a very strong bank,” Al Khudairy said on the sidelines of a conference in Riyadh. “I don’t think they will need extra money; if you look at their ratios, they’re fine. And they operate under a strong regulatory regime in Switzerland and in other countries.”
On the day gold closed up $20.40 at $1926.60, and silver closed down $0.16 at $21.77.
Zaner (Chicago) – “While the dollar index rejected a new low for the move overnight, the breakdown to the lowest level since early February provides only a minimal amount of cushion for gold and silver prices which are under an early liquidation wave. While some analysts indicate the aggressive reversal action in gold and silver this week is the result of market sentiment decreasing the prospects of a 50-basis point hike by the US Fed, it is possible the reversal was the result of a reduction in prospects that inflation might show it is immune to higher rates. With the gold and silver trade facing another inflation reading in the form of Producer Prices today and the trade expecting a minimal downtick from the prior month (which could still be considered inflationary) the bear camp looks to retain control. In our opinion, the New York Empire State manufacturing report and US retail sales will be of little impact today unless both come in uber-strong. While Chinese economic data released overnight registered “positive forward movement” many commodities market this morning are showing disappointment in the lack of even stronger recovery action. We discount overnight suggestions that gold and silver are under pressure because of rising treasury yields as yields this morning sit significantly below the levels posted at the beginning of this week. Clearly, gold is not benefiting from an ETF inflow of 300,404-ounces yesterday which was the largest single day inflow since June of last year. Unfortunately for the bull camp in silver, ETF holdings saw an outflow of 1.09 million ounces yesterday. In retrospect, the prospect of shifting into an old-fashioned inflation driven rally were dashed yesterday by mundane US CPI readings and we suspect more of the same will be seen today following US PPI. Therefore, we give the edge to the bear camp today with logical corrective targeting seen in June gold at this week’s gap which begins down at $1,892.50. Closer in support but less reliable pricing is $1,906, but we think the onus is on the bull camp to find a fresh theme capable of discouraging the market from a further corrective setback. The CFTC released another weekly positioning report yesterday reducing the number of delayed reports caused by hacking.
On Thursday gold settled mildly in the red as banking woes cooled in the US and Europe. Some reliable analysts consider this routine profit taking but I’m less sanguine and remain worried about what looks like guaranteed higher interest rates. That being said, if banking problems keep making the news the fear factor may take over, pushing gold prices higher.
The banks, these days are stressed but I can’t get my head around some type of banking contagion which will create a domino type failure of the system. The solution to banking stress, which happens on a regular basis is liquidity. The reason that the Swiss Credit liquidity issue was settled is because the Swiss National Bank made $54 billion available to Swiss Credit.
Such a large loan is unusual but not unprecedented. Bank of America had a similar credit crisis in 2008. Treasury Secretary Paulson then created the Emergency Economic Stabilization Act. The government lent Bank of America $20 billion dollars and the loan was paid back in full.
How much trouble Swiss Credit is in today remains to be seen but its stock was down 30% before its liquidity problem was solved. Of course, all this commotion created an updraft in the price of gold. Safe-haven buyers are usually anxious, especially in these troubled times.
But consider that gold’s initial rise was the result of two independent factors. Safe haven demand and short covering by the paper trade. Both may have been a knee-jerk reaction from investors already worried over higher interest rates.
The safe-haven portion could grow if the public continues to lose faith in the banking system. Short covering introduces volatile price swings. This market remains unstable because in the middle of these cross currents the ECB still raised interest rates in its fight against inflation.
Reuters – “The European Central Bank raised interest rates as promised by 50 basis points on Thursday, sticking with its fight against inflation and facing down calls by some investors to hold back on policy tightening until turmoil in the banking sector eases. A rout in global markets triggered by last week’s collapse of Silicon Valley Bank (SVB) and made worse by doubts around the future of Switzerland’s Credit Suisse had prompted some to question whether the ECB would pause its rate-hiking cycle.”
On the day gold closed down $7.60 at $1919.00, and silver closed down $0.18 at $21.59.
On Friday gold moved to its higher level since April of 2022 as financial fear grows and the public questions banking liquidity. For the present, it is the bears who are now hiding under the bed, even with the assured prospect of higher interest rates. European Central Bank President Christine Lagarde just raised interest rates a half point and is not concerned with bank liquidity. But notes that with rising uncertainty business as usual is not in the cards. This banking issue is overplayed in my book, but it does fit well into the preconceived ideas of the well-established physical bullion market. We are selling anything that is not nailed down.
Jim Wycoff (Kitco) – Technically, the gold futures bulls have the solid overall near-term technical advantage. Bulls’ next upside price objective is to produce a close in April futures above solid resistance at the February high of $1,975.20. Bears’ next near-term downside price objective is pushing futures prices below solid technical support at $1,875.70. First resistance is seen at $1,950.00 and then at $1,965.00. First support is seen at the overnight low of $1,922.30 and then at Thursday’s low of $1,911.50. The silver bulls have the overall near-term technical advantage. Silver bulls’ next upside price objective is closing May futures prices above solid technical resistance at $23.00. The next downside price objective for the bears is closing prices below solid support at $21.00. First resistance is seen at $22.25 and then at this week’s high of $22.525. Next support is seen at the overnight low of $21.785 and then at $21.465.”
Reuters (Bharat Gautam) – Gold sparkles in tumultuous week for markets – “Gold prices surged over 2% on Friday as a wave of banking crises shook markets in bullion’s biggest weekly rise in four months, while bets solidified for a less aggressive U.S. Federal Reserve in its fight against inflation. “Gold is surging on fears that more bad banking news could appear over the weekend and hopes that the Fed will pause its rate hikes next week,” Tai Wong, an independent metals trader based in New York, said. The collapse of Silicon Valley Bank in the U.S. has highlighted banks’ vulnerabilities to sharply higher rates, while a rout in Credit Suisse shares has added to market turmoil. “Gold is likely to shine through the chaos as investors adopt a guarded stance,” said Lukman Otunuga, senior research analyst at FXTM. The dollar and stock markets slid, making bullion a more attractive investment. While it is considered a hedge against economic uncertainties, gold’s opportunity cost rises when interest rates are increased. The Fed will raise interest rates by 25 basis points on March 22 despite recent banking sector turmoil, according to a strong majority of economists polled by Reuters who were divided on the risks to their terminal rate view. “The sudden tightening in financial conditions won’t help palladium whose usage is largely industrial though it is technically in the precious complex,” Wong said, adding that platinum “has just been a chronic underperformer and is struggling to shake its reputation.”
On the day gold closed up $50.80 at $1969.80, and silver closed up $0.76 at $22.35.
Platinum closed up $2.00 at $976.70, and palladium closed down $23.60 at $1372.20.
Zaner (Chicago) – “The action in the gold market this week has been very impressive as the bull camp has seemingly managed to shift fundamental focus away from bearish influences and embrace fundamentals that are supportive. In our opinion, the ability to shift focus to embrace positive themes is a hallmark of a “bull market”. However, the bull case in gold is still tentative because fundamental headwinds of rising rates, periodic fears of global slowing and a lack of consistent investment inflow to ETF holdings. Fortunately for the bull camp, gold ETF holdings this week have reversed the early pattern of outflows and have now posted two large back-to-back daily inflows. Yesterday gold ETF holdings saw 175,788 ounces flow in which narrowed the year-to-date contraction to 1.4%. Unfortunately for the bull camp in silver, ETF instruments yesterday saw another massive outflow of 5.1 million ounces which reduces the year-to-date gain to a mere 0.5% Obviously, gold will remain responsive to financial developments flowing from equities, treasuries, currencies, and central bank dialogue. Furthermore, it seems that gold and silver will continue to see money flows from residual global bank contagion fears but a significant slide in implied US treasury yields this week adds a secondary supportive force for the bull camp. While we saw yesterday’s nearly unchanged close as a possible sign of a temporary blowoff top from the Wednesday rally, seeing prices rally significantly this week on what is likely to be the largest weekly trading volume since the days leading into the US Covid lockdown indicates the market can attract fresh buyers. While not a definitively supportive development the latest release of delayed CFTC positioning reports showed further reductions in the net spec and fund long position thereby putting the net spec and fund long position at the lowest level since December earlier this month and that should have resulted in significant money sitting on the sidelines, part of which might have fueled the recovery rally this week. Obviously, critical resistance is this week’s high at $1959.10 with a failure price today seen with a trade below $1928. Gold positioning in the Commitments of Traders for the week ending March 7th showed Managed Money traders are net long 24,106 contracts after net selling 15,802 contracts. Non-Commercial & Non-Reportable traders were net long 119,907 contracts after decreasing their long position by 12,567 contracts. Clearly, the silver charts are definitively less positive than gold but still favor the upward tilt. Unfortunately, as mentioned already investors have turned cool toward ETF instruments and silver is mostly missing out on flight to quality buying interest. However, the latest positioning report showed the net spec and fund long in silver at the lowest level since September last year, thereby leaving silver less vulnerable to massive stop loss selling and potentially holding some additional buying potential.”
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