Consolidating at the higher levels

Apr 19, 2024·Alasdair Macleod

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Gold and silver were firmer on the week, with gold trading in Europe this morning at $2390, up $46, while silver was at $28.45, up 60 cents. While both were higher since last Friday, it is best described as a week of consolidation.

Overnight, the Israelis launched an attack on Iran, escalating the hostility towards all-out war. Gold spiked to $2415 on the news, but it appears that bullion markets decided not to panic. But it will make for an interesting day during US trading hours. 

Later today, it would be reasonable to suggest that the Swaps on Comex will attempt to lower prices, triggering stops. With recent buying appearing to come from Asia, American and European bullion banks will want to see the Asians safely out of the market before attempting to shake out the speculator long positions.

This would be repeating last Friday’s action, when at 11.00 EST, which is 23.00 in Shanghai, gold fell $100 from $2432 by 15.00 EST. This time, gold and silver are less extended, so perhaps any markdown, if it occurs will not be so dramatic.

The bullion banks taking the short side have huge mark-to-market losses on Comex, as my next chart illustrates.

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The shorts are 28 in number, with an average loss of $2.22bn. Some of them are also short of silver, adding a further $480m. Putting these positions together suggests that one or more bullion banks could be in trouble if prices rise from here.

Their attempts to stop gold and silver prices from rising have obviously failed. That both metals have run higher so strongly suggests that the capacity of the bullion banks to control these markets is actually quite limited. And everyone is asking about the identity of the large buyer who has driven gold prices up $400 since St Valentine’s Day, and silver by over $6.

They are looking in the wrong direction. Everyone assumes that it is gold rising, when a better approach is to understand that it is the dollar falling. The starting point for understanding the difference is to remember that gold is legal money and respected as such internationally, while the fiat dollar is credit with counterparty risk. From a foreigner’s viewpoint this is the attitude to take. Foreigners, particularly the Chinese and others in Asia, are certainly buying gold, but not necessarily in the quantities to justify the rise in the gold price according to conventional analysis. The point is that foreigners are not buying dollars, and at the margin they are selling them. And when we are told that China’s Peoples Bank is buying gold, the reporters have it the wrong way round: the PBOC is selling fiat dollars and other fiat currencies for real money.

When this is understood, the dollar rising against other currencies while it is falling against gold makes sense. The next chart is of the USD trade-weighted index, confirming the dollar’s strength against other fiat currencies.

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The reason foreigners are selling dollars is that it is becoming clear to them that the US Government’s debt trap will lead to higher bond yields. And higher bond yields increase dollar credit risk because they will destabilise the economy, the banking system, financial asset values, and the dollar itself. Bond yields are already ticking higher as my last chart shows.

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In a nutshell, gold is rising because the dollar is falling. And the dollar is falling because a massive credit crisis is becoming more certain by the day.

For more analysis of gold and silver, go to MacleodFinance Substack