Banking Crisis Sinks In

Gold and silver consolidated recent gains before rallying to test higher ground. In European morning trade, gold was $1992, up a net $4 from last Friday’s close. Silver outperformed gold at $23.15, up 55 cents. Open interest in gold has increased from February lows as the next chart shows, but still has considerable headroom.

Analysts following relative strength indicators claim that gold and silver are overbought, but they are looking at the wrong indicator. Comex Open Interest clearly shows that there has been a pick-up in speculator positions — they are one side of OI which has increased since February by nearly 55,000 contracts. But there is still considerable upside in this indicator before it screams overbought at 600,000 contracts.

The position in silver is amazing — there’s no other word for it. Open Interest is as low as it gets. This chart is next.

At only 119,281, OI has not been this low for many years. It indicates zero bullishness in the Managed Money category (hedge fund speculators). This divergence from gold does have an obvious explanation — the gathering storms over global banks. It has led to genuine hedging demand for gold contracts, but not for silver which is regarded more as an industrial metal than a financial hedge.

That said, industrial metals have been quietly firm as well, with copper rising 5% over the last month, while energy prices have declined by about 8%. But the big story is all about failing banks. While we are acutely aware of a depositor run on some banks sparked by fears of counterparty risk, we are less aware of a run on physical gold (and silver to a lesser extent) as Asians dump dollars for bullion. 

We see this manifest in a different set of completely unrelated numbers. While bank share prices in the US, EU, UK, Switzerland, and Japan have been tanking, in China they have been rising. In other words, the banking and credit crisis is solely a Western phenomenon from which Asians are trying to escape.

But returning to paper markets, gold appears to be consolidating for an assault on the $2,000 level. Undoubtedly, there are some short-term bulls driven by the sell-dollar/buy-gold and vice-versa trade, who on the slightest sign of a rally in the dollar’s trade weighted index will reverse their positions, or be shaken out by bullion banks which have taken the short side.

For what it’s worth, next up is the technical chart, which suggests that more consolidation for the dollar price of gold would be healthy.

The move above these popularly followed moving averages confirms the whole move is in bullish sequence, but the sideways consolidation which started from the $2070 level in August 2020 is still intact. Only when the price breaks above that convincingly will pattern chartists be fully satisfied.

In silver, the equivalent level which was achieved in August 2020 and February 2021 is $30. But for now, it’s all about a banking crisis and the buying of physical gold.