Precious metals stasis

Jan 26, 2024·Alasdair Macleod

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Gold and silver prices steadied this week, trying to find a sense of direction. In European trade this morning, gold was $2022, down $7 from last Friday’s close, and silver was $22.92, up 30 cents. Comex turnover was moderate. Interestingly, expiring options and contracts haven’t yet triggered volatility.

For now, it appears that gold is happy to consolidate above the $2000 level. But a suspicion that this support level is at risk of being broken appears to be the view in paper markets. Indeed, the lack of enthusiasm for the bullish case is reflected in the hedge funds, whose net longs on Comex are only 83,229 contracts (16 January) compared with a long-term neutral position of 110,000. This is shown in our next chart.

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The apathy is remarkable. Since January 2020, the gold price has risen 40%, while net longs have more than halved, admittedly from overbought levels. In other words, the gold price has risen without buying by market traders. Yet technical analysts looking at a chart of the gold price would say it paints a positive picture. This is next.

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For now, the price is finding support at the 55-day moving average, but even if this doesn’t hold, a deeper reaction should find stronger support at the 12-month MA currently at $1950. Being consistent with a sell-off to fool everyone that the $2000 support becomes insurmountable supply, on sentiment grounds I would not rule it out. But given the economic background it should be a buying opportunity.

So, the technicals are positive. But we are dealing in markets driven by Keynesians who lack understanding of credit, mistakenly believing that currencies are money. This fundamental error side-lines gold which in former times gave currencies their credibility as money substitutes. This mistake is why markets view rising interest rates and bond yields as bad for gold, which has been a brake on sentiment in recent weeks as our next chart shows.

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Since 27 December, the yield on the 10-year US Treasury note has risen 40 basis points, violating the downtrend. From a technical standpoint, it is too early to say that this is meaningful, but there are some worrying developments ahead. The oil price has suddenly risen 10% for little obvious reason. Yes, the Houthis are still making life difficult, forcing tankers to divert round Africa. It is perhaps just one of a number of straws in the wind questioning the low inflation narrative.

To understand why gold can rise along with inflation and bond yields requires a dismissal of the Keynesian belief that fiat currencies are money, when in fact they are credit exposed to counterparty risk. In the dollar’s case, along with the other major currencies, rising interest rates exacerbate the government’s debt trap on the eve of a slump in business activity. These are the conditions to highlight the counterparty risk of owning dollars. And as I’ve consistently argued, it is not that the gold price is going up, but the dollar is going down.