Breakout!Jul 14, 2023·Alasdair Macleod
After drifting lower for the last two months, silver staged a massive breakout on good volume, followed by gold. In Europe this morning, silver was $24.75, up $1.75, and gold $1957, up $48.
On Comex, Open Interest rose strongly, as our next two charts show.
What is interesting is that historically open interest in both contracts have the potential to double to levels seen in January 2020. That obviously involved excessively overbought conditions, but it could happen again. But before we look at the conditions which could lead to that let’s look at the technical position. This is our next chart.
Having tested all time highs in early May, gold naturally backed off to consolidate the gains made in the run up from $1620 last September, completing a large consolidation which commenced in August 2020. Technicians point out that the consolidation lasted almost exactly two years and complies with an Elliot wave theory A-B-C correction, the move from last September being the first leg of a new bull phase. Furthermore, it takes the appearance of the classic flag of pattern analysis.
As to whether gold is ready to test and break through the upper boundary of the flag, we need to look at what’s happening to the dollar. It’s trade weighted index is next.
The break below the crucial 100.50 level has been sudden and dramatic, with bullish implications for the whole commodity complex. WTI oil for example has risen nearly 15% from late-June. And clearly, the downside for the TWI can be expected to take it well below 90 as a minimum target.
The breakdown was triggered by softer than expected inflation figure in the US this week leading to a fall in bond yields, with the yield on the 10-year US Treasury note falling 25 basis points.
It has also follows the surprise announcement by Russia that a new gold-backed trade settlement currency is on the agenda for the BRICS meeting in Johannesburg to replace the dollar as the trade medium. This represents the most serious challenge on the dollar’s status since the Bretton Woods Agreement was suspended 52 years ago. Furthermore, over that time foreigners and their central banks have accumulated dollar deposits and financial assets totalling over $30 trillion, more than the entire US GDP.
The danger to the dollar from this development could be considerable. For some time, foreign central banks have been collectively slowing their purchases of US debt. The threat that this could turn into net sales not only undermines the dollar, but also government finances. And this week, Janet Yellen went to Beijing, presumably to discuss China’s holdings of US Treasuries in light of the BRICS announcement. (Officially, this was not the reason for the trip, for obvious reasons.)
The threat to the dollar and US Government finances will be increasingly concerning in the run up to the BRICS summit. Markets will attempt to discount the consequences, which can only lead to hedge funds selling dollars to buy gold and silver.