A week of consolidation for gold and silver ends with a strong performance for silver. Driving silver’s price are factors common to gold, plus the gradual reopening of Indian demand.
Silver volumes on Comex have been high for the last seven trading sessions, while open interest has climbed from ultra-low levels, but it is still in deeply oversold territory by this measure:
India’s silver imports have been curtailed by the Indian government’s action in a deluded attempt to improve its trade balance. It has suppressed not only investment demand, but also industrial demand from the government-supported solar panel industry. This error is slowly being remedied as new import licences for some 400 tonnes have now been approved.
While Indian demand is not the only factor driving silver, investors who have been very bearish are now overhanging the market as buyers, a factor which is making market makers and bullion bank traders on the short side nervous. Hence, we see the characteristics of a new bear squeeze, reinforced by the managed money category virtually out of the market, illustrated by their lowest long position for 20 years:
It’s often said that silver’s trend leads that of gold, on the basis that speculator activity is reflected there first due to poor liquidity. That being so, then a pickup in silver speculator longs beginning to be seen in the chart above augers well for gold. But we have already observed and drawn readers’ attention to a fundamental change in gold’s behaviour, reflecting what is termed the return of the debasement trade.
Adding to the debasement of the dollar being reflected in a rising dollar-gold price is commodity scarcity, particularly diesel today which affects all consumer prices, and farm produce tomorrow due to a convergence of disruptive factors. Crack spread premiums over the oil price are rising again (HT Data4thepeople):
As well as rising fuel costs the weather, the most powerful el Niño, lack of fertilisers, and the closure of Ukraine’s Black Sea ports are collectively conspiring to drive up food prices later this autumn.
Wholesale wheat prices are already up 46% this year and rice 55%. Due to drought, farmers in Europe and the UK are drawing on winter feed stocks for livestock, guaranteeing a crisis later. It is only a short matter of time before markets will anticipate the consequences for G7 currencies’ purchasing power. And a quick scan of their 10-year bond yields shows them still trending higher, despite the US treasury acting to suppress its bond yields.
Later today, Fed Chairman Kevin Warsh delivers his Jackson Hole speech which may or may not move markets. Will he be candid about the inflation outlook? So far, he has refused to be drawn on forward guidance, but as the cliché goes that is the elephant in the room.
In the grandest of schemes, the facts are that bond yields are going higher destabilising credit bubbles, and the dollar’s value priced in gold grammes is declining at an accelerating rate. No amount of speculation will change these facts.