Market Report: A week of consolidation

Aug 4, 2017·Alasdair Macleod

Gold Silver 2017
Gold and silver consolidated recent rises this week. On closing prices, gold barely moved from last Friday’s close, standing at $1269.50 in early European trade this morning. Intraday, prices were range-bound, capped in the low $1270s and underwritten in the low $1260s. The bias seems to be one of trying to break out, in which case an assault on the $1290-1300 level is in prospect.

Traders, who have recently been record short, will note that the technical position is looking good, as our next chart shows.

Gold USD

Once again, the price, 55-day and 200-day moving averages are in bullish sequence, with the averages both turning higher. Doubting Thomases might argue that gold is still in a consolidation pattern, but even then, they cannot deny the likelihood of a test of this year’s highs.

The gold price has been very subdued this year, only up 10% against the dollar. It’s performance against other currencies has been significantly weaker, as our next chart shows.

Gold Indexed Multi Currency

In this calendar year, euro-based investors are sitting on losses of about 2%, reflecting the strength of the currency. Even sterling based investors have had earlier gains substantially pared. So, the headline price in dollars, up 10%, is best case.

From overt bullishness at the time of President Trump’s inauguration, the dollar has weakened considerably. Part of this is due to more consistent signs of economic growth in the EU, Japan and the UK, while Trump’s trade policies are isolating America.

The latest news overnight gives a new cause for concern over the dollar. Special Counsel Robert Mueller is impanelling a grand jury, subpoenaing Donald Trump Jr over his meeting with a Russian lawyer before the election. It appears that that meeting, as reported and admitted, might contravene Federal law, which bans the acquisition of materials from a foreign government they may have about an opponent. Furthermore, President Trump appears to have implicated himself by personally dictating a statement as to what Trump Junior discussed at the meeting, even though he wasn’t present.

This looks like a can of worms being opened, which could become a serious issue for the presidency and therefore the dollar. And if the dollar weakens further, the gold price could certainly challenge, and exceed, the $1300 level in short order.

Silver looks good too

Silver remains oversold, mainly because the speculative positions in Comex are still predominantly in the September contract, which is yet to roll off this month. The following chart of the managed money category shows that short positions last recorded were close to record levels.

MM Silver Shorts
Last Tuesday’s Commitment of Traders’ report, released after-hours tonight, might not be substantially different, given the silver price was barely changed. Ahead of gold’s August contract, gold was similarly oversold, which meant the contract wound down on a vicious bear squeeze.

If the dollar weakens as discussed above, it would provide a similarly positive background for the unwinding of silver’s September contract. Last night, preliminary open interest in this contract stood at 134,110 contracts. At a guess, the managed money short position is about one third of this. The potential for a good bear squeeze should be obvious.

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