Gold challenges $1900Jan 13, 2023·Alasdair Macleod
Gold and silver were in bullish mode this week, with gold rising strongly and silver consolidating earlier gains. This morning in European trade, gold was at $1905, up $40 from last Friday’s close. On the same time frame silver was unchanged to trade at $23.78. Comex volumes were healthy in both metals.
Since early November, gold has rallied $280, encouraging technical analysts to call for a correction. But there are two things that confound them: while Open Interest on Comex has risen sharply, at 488,147 contracts it is still in marginally oversold territory, suggesting gold could easily run further. The OI position is up next.
On this measure, before gold is truly overbought we can expect to see Open Interest rise by at least another 100,000 contracts towards the 600,000 level. Meanwhile, there is very good momentum under the price, as my tweet of last Wednesday pointed out.
The other side of the gold trade is the dollar’s trade weighted index. This is up next.
The TWI has been in freefall, again encouraging technical analysts to call for a countertrend rally. But the problem here is that bond markets are adopting the view that the ECB and Bank of Japan are still raising rates, while an end is in sight for increases in the Fed funds rate. This is particularly the case for Japan, where the BoJ’s upper yield limit of 0.5% for the 10-year JGB has been challenged and broken.
There is little doubt that the BoJ will have to move its yield target higher. In December, CPI inflation registered 4%, above the forecast 3.8% and double the 2% band. This matters for the dollar, because Japan is a larger exporter of capital than the EU, and her institutions have turned sellers of foreign markets. Furthermore, the carry trade which sold yen for dollars to arbitrage yield differentials still has some unwinding to do, and the sharp rally in the yen could become a rout for the dollar.
At the highest levels, these forces appear to be understood. In December, China declared an addition to her official reserves of 30 tonnes. But Mark Bristow, the highly respected and well informed CEO of Barrick Resources revealed that his information was that China had actually acquired “in the higher 200s” tonnes of bullion in December. That the largest gold mining nation by output is selling US dollars for additional gold bullion in the international markets surely tells us something is up.
There is little doubt that Saudi Arabia’s move to accept petroyuan at the expense of petrodollars will have a major impact on how, not just oil producers but also the entire list of Asian nations, view the dollar. Meanwhile, North American based commentators are broadly unaware of the consequences of these pressures, adhering to the belief that there is only one reserve currency, which foreigners will need to continue to accumulate. Accordingly, they underestimate the forces driving the dollar lower and gold higher.
While a pause in gold’s rally appears likely, it could be dangerous to trade for a setback.
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