Gold and reflation

Stalling inflation, Trump’s $2k stimmies, Japan and China stimulating, and the tech bubble bursting. It’s short-term uncertainty for gold, but it’s all part of fiat’s road to ruin.

Gold and silver marked time this week, coming up to the end of month push for lower prices on Comex. In London this morning gold was $4050, off $33 from last Friday’s close. And silver was $49.20, down $1.30. Option expiration is on Monday, so the shorts are massaging prices lower to ensure as many calls as possible will expire worthless.

In recent weeks, we have seen the US abandoning inflation targeting in favour of injecting liquidity into the US financial system. Now Japan has announced a reflation stimulus of $135bn, and China is also preparing a new property stimulus package (ZeroHedge). European G7s are bound to follow.

There is something highly unusual occurring in gold futures. Coming into the final week for the December contract, usually it runs down as positions are either sold or rolled in the next active month, which is February. And indeed, with February’s open interest up by 22,466 contracts on preliminary estimates, this can be seen. But unusually, there are still 216,129 December contracts open representing 21.6 million ounces. Furthermore, instead of declining, Dec open interest rose a net 11,615 contracts overnight. Admittedly, there have been some significant revisions from preliminary to final figures in recent days, but it appears to signal substantial demand in order to stand for delivery. 

This being the case, the global squeeze on bullion will move to Comex in the coming weeks. It will drive futures to a premium over spot, creating a repeat of the arbitrage debacle earlier this year, which drove gold from $2600 to $3500. Only this time, there is insufficient physical liquidity in London and elsewhere for the arbitrage.

To judge the likely consequences for traders, the next chart shows the relationship between open interest and the gold price

The reason for showing it is to demonstrate the level of speculator apathy, open interest being below its average of recent years. When gold next breaks higher, momentum-driven investing is likely to add to the stand-for-delivery demand to add to a liquidity crisis in this contract.

Next up is gold’s technical chart, which shows how the widely watched moving averages are catching up with the price. It suggests that it shouldn’t be long before the current consolidation phase will be over and the next leg up is underway.

While gold is obviously on the up in its own right, most of it is attributable to forward-looking assessments of the dollar’s declining purchasing power. It tells us that its outlook is of an accelerating decline, taking other fiat currencies down with it.

We should also look at the fundamentals driving the dollar and its fiat cohort lower. It’s encapsulated in one word: reflation. Faced with stagnating economies, in conjunction with their finance ministries they are ditching inflation targeting in favour of further stimulation. 

The US Fed is leading the way for other central banks by abandoning QT and says it will reintroduce QE in January. Having been briefed on the economic outlook, President Trump is promising $2,000 stimulus cheques for all US citizens describing it as a tariff dividend. At the US-Saudi summit he renewed pressure on Jay Powell to reduce interest rates. Unless Powell wants to go down as a weak Fed Chair, he will dig his heels in and not reduce rates in December.

It is this reality which has led to some weakness in gold this week. But there is rising instability in equity markets, with doubts over the AI bull evidenced by share prices of Oracle declining and the cost of its default insurance rising. Leading the way to a tech bubble imploding is bitcoin, which correlates neatly with the tech cohort:

The consequences of this disaster for the whole crypto industry, and the Mag7 A.I. high-fliers should not be ignored. Highly profitable momentum trades are rapidly turning sour. The bubble is bursting. Reflation to rescue the entire system of financial credit will go into overdrive. There is no alternative, unless the authorities are prepared to step over the dead bodies.

Got gold?