Gold – Interest Rates Cap New Highs
Commentary for Friday, May 12, 2023 (www.golddealer.com) – Today gold closed down $0.20 at $2014.50, and silver closed down $0.27 at $23.99. The price of gold caught a small updraft this morning as worries about US debt default kept bullion’s safe haven demand intact according to Reuters. While this rally sold off ($2020.00) gold clawed its way back to about unchanged on the day, which nicely tells the story of gold prices this entire week. The bulls unsuccessfully challenged the $2020.00/$2030.00 range as the bullish momentum seen in early May ($2050.00) fizzles over the fear of higher interest rates. Last Friday gold closed at $2017.40 / silver at $25.74 – on the week gold was down $2.90 and silver was down $1.75.
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On Monday the price of gold continued a rather choppy but supportive trading pattern between $2018.00 and $2029.00. The Dollar Index appears rangebound between 101.00 and 101.50 since last Thursday so the gold trade this week may remain “quiet and waiting”. This will require patience because the next “big event” is not scheduled to take place until June 13th and 14th. The FOMC will have a meeting associated with a Summary of Economic Projections.
Today’s “bounce” in the price of gold from last Friday’s significant drop was not exactly enthusiastic. Which emphasizes the notion that gold may be settling into a less dramatic trading mode perhaps further encouraged by improving inflation data. The problem with inflation is that it is difficult to come up with a definition which makes everyone happy.
But there is enough evidence to at least question the theory that inflation continues to rise. Data gathering companies (I:US Inflation Rate) claim that inflation has moved from over 8% last year to 4.99% through March of 2023. It is still a big problem at 4.99% but we may be moving in the right direction. And a “cooling” is all the Fed needs to slow down rising inflation rhetoric.
Reuters (Deep Kaushik Vakil) – Gold claws back on softer dollar; US inflation data on radar – “Gold rose on Monday as the dollar eased, with bullion regaining ground after a sharp retreat in the previous session ahead of inflation data that could shed light on the outlook for U.S. interest rates. “Markets are really just discounting the aftermath of last Friday’s payrolls report,” which came on very strong and knocked gold off its highs, said Daniel Ghali, commodity strategist at TD Securities. Prices are about 3% lower from near record levels reached last week, pressured after data showed U.S. job growth accelerated in April, pointing to persistent labor market strength. Still, “the gravitational pull for gold is higher … as we approach an upcoming recession, the market pricing for Fed cuts on the horizon is set to grow and in turn, that should support discretionary traders to deploy their capital in gold,” Ghali added. Markets saw a 91% chance of the Fed holding rates at their current level in June, and a 33% chance of a rate cut in July, according to CME’s FedWatch tool. The dollar index dipped for a second straight session, making bullion more attractive to overseas buyers. Later on Monday, the Fed’s loan officer survey might show whether and how hard banks are tightening up on credit after three U.S. lenders failed over recent weeks. “If the woes among regional banks are thrust back into the spotlight, that could trigger another leg up for this safe-haven asset,” said Han Tan, chief market analyst at Exinity. Along with the U.S. consumer price index (CPI) due on Wednesday, traders are also keeping a tab on developments surrounding the debt ceiling.”
On the day gold closed up $8.90 at $2026.30, and silver closed down $0.10 at $25.64.
Zaner (Chicago) – “While today’s economic report slate is benign, data in subsequent sessions will likely produce significant reactions in gold and silver with China releasing import and export figures tonight and the US releasing key inflation readings later in the week. Overnight China apparently raised its gold holdings by 8.09 tons last month, resulting in October through April gold reserve additions of 120 tons. The overall Chinese gold reserves is pegged at 2,076 tons, but we suggest that number is an unsubstantiated figure likely to be strategically understated by the Chinese central bank. Last week gold ETF holdings increased by 138,847 ounces but those holdings remain down 0.2% on the year. On the other hand, silver ETFs reduced their holdings by 1.2 million ounces last week with year-to-date gains in silver holdings 0.2%. With the big range down failure at the end of last week, the bias in gold is down and to a lesser degree down in silver. Clearly, the strong US nonfarm payroll reading and the downtick in the unemployment rate reduced economic uncertainty interest in gold and at the same time provided a very minimal lift in the US dollar. However, with the June gold contract into the Friday high trading $60 an ounce above the level where the last COT positioning report put the net in spec long at the highest level since last April, the net long in gold is likely approaching the highest levels since the beginning of the pandemic! The Commitments of Traders report for the week ending May 2nd showed Gold Managed Money traders were net long 147,816 contracts after increasing their already long position by 14,642 contracts. Non-Commercial & Non-Reportable traders had 247,048 contracts net long after increasing their already long position by 10,241 contracts. Even the fundamental side of the equation favors more downside action in gold as Indian buyers are showing signs of high price sensitivity, the World Gold Council posted softer 1st quarter demand readings, and the Chinese economy has failed to show positive traction following the removal of activity restrictions. The path of least resistance is down with initial targeting in June gold seen at $1,982 and a breakout below that level seen if the dollar manages to regain 102.00. In our opinion, the dollar lacks bullish buzz as evidenced by the failure to range sharply higher Friday despite patently strong monthly jobs news and because of a slight shift against a Fed “pause” because of the jobs data. As in the gold market, the silver market also saw reversal action from last week’s high but the damage on the charts was not as significant as in gold and in retrospect did not appear to damage the charts. We suspect better economic news from the US will provide support to silver as a physical/industrial commodity and think silver ETF investment patterns will remain positive. However, a measure of back and fill balancing of a large net spec and fund long would not be surprising, especially with July silver into the high Friday trading $0.80 above the level where the last positioning report was measured. Therefore, adjusting for the post report gains the net long in silver is likely the largest in 13 months. The Commitments of Traders report for the week ending May 2nd showed Silver Managed Money traders were net long 27,131 contracts after increasing their already long position by 1,964 contracts. Non-Commercial & Non-Reportable traders net long 47,448 contracts after net buying 4,411 contracts. Initial and perhaps unreliable support is seen at $25.355 with the $25.00 level solid support unless the dollar soars and or gold falls precipitously.”
On Tuesday gold surprised with a mild upward bias, touching lows of $2024.00 on two occasions but climbing, and settling at session highs between $2034.00 and $2037.00. Some insiders consider this pattern simply “treading water” but it helps encourage the bullish gold scenario at a time when positive or negative speculation is jumped on by traders looking for something more tangible in this transition. Anything relating to an impasse over the US debt ceiling will cause gold to yawn. Neither the Democrats nor Republicans will take the steps necessary to balance the American checkbook. I would have more respect for Washington if they simply told the public a balanced budget has always been a myth and stopped this pretense.
Wednesday we will see April’s consumer price index which may move the trading needle. At the same time CNN cites the “The April 2023 Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS)” addressed changes in the standards and terms on, and demand for, bank loans to businesses and households over the past three months. Much lending remains unchanged, but some in consumer areas is tightening. Which cuts both ways for the gold trade.
Reuters (Deep Kaushik Vakil) – Gold gains on economic risks with US inflation in focus – “Gold gained on Tuesday as investors sought cover from economic uncertainty while also positioning for the U.S. inflation print for cues on the trajectory of interest rates. Equities markets fell on concerns about China’s domestic demand recovery after weak Chinese trade data, and the impasse over the U.S. debt ceiling. “It’s going to be a risk-off day” as markets await U.S. consumer price index data on Wednesday, said Phillip Streible, chief market strategist at Blue Line Futures, in Chicago. Fed Governor Philip Jefferson said the U.S. economy is slowing in an “orderly fashion” allowing inflation to decline even as growth continues. New York Fed chief John Williams said inflation remains too high, but tighter credit should slow the economy, blunting how far the Fed might need to go. Markets are pricing in an 82% chance of the Fed keeping rates on hold in June and a 33% chance of a cut in July. Commerzbank analyst Carsten Fritsch, however, wrote in a note that there is no scope for the Fed to implement rate cuts this year. Investors were also monitoring developments in the U.S. banking sector after a Fed survey released on Monday showed banks tightened credit standards over the first months of the year. Hotter-than-expected CPI would bolster bets for rate hikes, but much weaker data could cause “a big rush into commodities across the board and further liquidation in the dollar”. While gold is considered a hedge against inflation, rising interest rates dull non-yielding bullion’s appeal.
On the day gold closed up $9.90 at $2036.20, and silver closed up $0.06 at $25.70.
Zaner (Chicago) – “In retrospect, the gold market has held up better than we anticipated following the major reversal action last week. While gold spent nearly the entire Monday trade in positive territory, it forged a much tighter trading range relative to the action last week, perhaps because the trade is looking ahead to the uncertainty of the US CPI report on Wednesday morning. However, a portion of the trade sees the US CPI report as potentially supportive of the idea that consumer inflation will remain elevated. The gold market is likely seeing pressure from disappointing Chinese commodity import data this morning which has fostered a risk off view toward many physical commodities. On the other hand, Chinese exports increased last month which should provide stimulus to that economy going forward. An issue that could provide fresh flight to quality buying in gold today, is a debt ceiling meeting at the White House as we expect the meeting to yield a quick stalemate as the President has made it clear he will not negotiate. The gold market clearly derived a significant amount of buying on the October through early May rally of $400 off the inflation theme and the threat inflation is not slayed yet could result in a June gold rally above $2,100 later this week. In today’s action gold should see minimal residual support from the 85,362-ounce inflow to gold ETF holdings yesterday but holdings year-to-date are nearly flat. While we do not want to be seen as offering conflicting advice, it is possible that a hotter than expected inflation reading Wednesday could in addition to the strong nonfarm payroll reading from last Friday could result in the markets removing the “hope for a pause” by the Fed from the equation thereby creating a series of headwinds for gold, silver, and many physical commodity markets. In other words, a market decision that the Fed will shift back into a rate hike posture could revitalize the dollar and create problems for gold and silver. At least into the Wednesday US CPI report we expect June gold to hold above $2,000 with closer in pivot point support seen at $2007. Unfortunately for the bull camp in silver ETF holdings saw an outflow yesterday of 1.3 million ounces, leaving the year-to-date change in holdings at zero. While the silver market spent a large portion of the Monday trade in negative territory, the market basically held near the Friday close which represented the middle of a very wide $1.02 daily trading range. Silver posted a significant setback and aggressively rejected a large portion of the washout potentially indicating value above $25.41. Despite the divergence in gold and silver prices on Monday we think silver will correlate tighter with gold in the coming 72 hours.”
On Wednesday the price of gold moved higher on the CPI news, but the rally was short lived, and pricing settled on the day in the red, suggesting a mild profit taking round. Which should tell you traders are worried about that “sticky” inflation which remains high and provides the necessary justification for the Fed to continue raising interest rates.
I have moved back on forth on this issue but lately I see the Fed more in the hawkish light – which may eventually place the bulls in a more defensive position.
There are professionals, however, who believe it is time to prepare for the so-called “soft landing”. Which implies falling interest rates and less financial drama, both on Wall Street and in our banking system. If this is the case, it would at least support gold and silver prices.
The basic argument for bullion ownership during this period of adjustment is the notion of “value”. The amount of fiat money sloshing around in the world is gigantic and growing. Which suggests the prices of both gold and silver are cheap in relative terms.
This past month gold has challenged the $2050.00 overheard resistance twice and failed both times. The secure fallback position during this consolidation falls between $1990.00 and $2000.00, so it’s reasonable to assume that this tight range will continue in the short term.
On the day gold closed down $5.70 at $2030.50, and silver closed down $0.24 at $25.46.
Jim Wycoff (Kitco) – “Technically, June gold futures bulls still have the solid overall near-term technical advantage. Prices are in a 2.5-month-old uptrend on the daily bar chart. Bulls’ next upside price objective is to produce a close above solid resistance at the record high of $2,085.40. Bears’ next near-term downside price objective is pushing futures prices below solid technical support at $1,980.00. First resistance is seen at today’s high of $2,056.00 and then at $2,063.40. First support is seen at this week’s low of $2,022.00 and then at $2,007.00. July silver futures prices were scoring a bearish “outside day” down. The silver bulls have the solid overall near-term technical advantage. Silver bulls’ next upside price objective is closing prices above solid technical resistance at $27.00. The next downside price objective for the bears is closing prices below solid support at $24.00. First resistance is seen at $26.00 and then at the April high of $26.435. Next support is seen at today’s low of $25.455 and then at $25.25.”
On Thursday the price of gold dipped in early trading, falling to $2010.00 as the Dollar Index moved to weekly highs reflecting mildly dovish jobs and inflation data. Traders bought the dip, but the bounce lacked conviction. And recession worries may be coming back into focus.
Gold remains defensive, closing on lows for the day. And the recent downward drift remains in place. Our shiny friend’s pricing range was around $30.00 this morning as this trade turns into the classic “Goldilocks” situation – not too hot and not too cold.
Today modest selling increased across our trading desk, so the public is considering profit taking. But a few very large hitters have reappeared and will buy physical products if gold trends lower. So, sentiment is mixed as usual, which makes sense in these troubled times.
In an important outside event, the Bank of England raised its interest rate to 4.5%, the highest level in 15 years according to The New York Times. This should be noted because at the same time one of their governors said the British economy was stronger than expected. Their economy is similar to ours, suggesting that our Fed will also continue to raise interest rates to fight inflation. This scenario does not favor higher gold prices during this unwinding process.
Reuters (Deep Kaushik Vakil) – Gold stalls as dollar bounce counters economic risks – “Gold eased into a tight range on Thursday as a stronger dollar countered support from weaker-than-expected U.S. economic data, which reinforced bets for a pause in the Federal Reserve’s rate hikes and added to wider economic risks. The number of new U.S. jobless claims jumped last week to the highest level since late 2021, while U.S. producer prices posted the smallest annual increase in April in more than two years. The data wiped out expectations the Fed will raise rates again in June and also fueled bets for rate cuts later on. With inflation still sticky amid slow deterioration in the U.S. economy, “the Fed’s less likely to feel the need to increase rates further,” keeping gold in a sideways to higher trend, said David Meger, director of metals trading at High Ridge Futures, also buoying safe-haven bullion was concerns surrounding the U.S. debt ceiling and weak Chinese data. On Wednesday, data showed the annual increase in U.S. consumer prices slowed to below 5% in April for the first time in two years but remained well above the Fed’s 2% target. While gold jumped after the U.S. inflation report supported the market’s view of a Fed pause, “the fact it fueled further rate cut bets during the second half, currently around 80 bps, may end up being gold’s biggest short-term challenge,” wrote Ole Hansen, head of commodity strategy at Saxo Bank, in a note.”
On the day gold closed down $15.80 at $2014.70, and silver closed down $1.20 at $24.26.
On Friday I would not exactly call the gold trade tired, but it continues to struggle with tough overhead resistance. Without fresh bullish information we may eventually fall back into the $1950.00 / $2000.00 channel which was established in early March of this year.
For now, we are clearly in a short term downtrend which began in early May ($2050.00). But this downtrend is already significant, which suggests an oversold position. Do not be surprised if we see volatility next week so keeping your seat belt fastened is still great advice.
On the day gold closed down $0.20 at $2014.50, and silver closed down $0.27 at $23.99.
Platinum closed down $38.00 at $1070.10, and palladium closed down $40.20 at $1521.80.
Brothers and Sisters, thank you for your friendship. If you have unusual circumstances, need cash or a special favor – talk to Harry or Eric. We are now back to our traditional business model. Thank you for your patience. Have a blessed day. Richard Schwary
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