Gold and silver are rallying strongly today, but Open Interest on both metals has collapsed leaving plenty of room on the upside for continued gains.
April 17 (King World News) – Alasdair Macleod: In short supply already, anyone can see that demand for gold and silver will increase substantially. Yet markets are worryingly complacent, and it’s not just in precious metals.
Surreal hardly describes it. Equities are hitting new highs on the back of little more than Truth Social posts. The guys below appear representative of today’s investors.
First, let’s look at last week’s events for gold and silver.
Gold and silver were little changed on the week, with gold at $4785 in European morning trade, up $40 on the week, and silver at $79 was up $3.05. Trade in silver on Comex has picked up to moderate levels, while in gold it remains subdued.
Open interest in both Comex contracts remain very low. This is illustrated next:
Both markets, but particularly silver appear thin with little speculator interest providing liquidity. It has been noticeable this week that both contracts reflect demand in Asian hours with prices firming during Shanghai’s trading. But this demand diminishes while Asia sleeps.
So far, these diurnal influences are relatively minor being against a background of hope triumphing over reality with respect to the war against Iran. Equity markets around the world are hitting new highs despite the inflationary pressures in the pipeline which are bound to drive up bond yields.
On the positive side for gold, France very cleverly sidestepped the issue of whether its earmarked gold at the New York Fed actually existed by selling it to the Fed for printed dollars with which it bought gold to cover in the markets. The message to other holders of the 5,860 metric tonnes of earmarked gold at the NY Fed is that they should do the same. But in these markets, instead of a covered bear operation it would be wiser to buy the gold first, then sell its earmarked position to the Fed. The Fed prints the dollars, and everyone gets their gold.
Meanwhile, there’s a disconnection between physical oil prices, which are as much as $150 while futures trade at $90. And we all thought that markets were anticipatory in nature: clearly not in this case. Gold bugs have long suspected that what we are seeing in oil is what happens or is going to happen in gold and silver.
Such hopes might still be premature. Whatever happens over Iran and Lebanon, one thing is certain: there will be a global inflation-cum-slump shock, particularly if Hormuz doesn’t fully open soon and the Houthis don’t kick off at the Bab al-Mandab straits cutting off Suez and 6m barrels of oil per day from Saudi’s Yanbu terminal.
Short term issues for gold and silver
Clearly, markets are ignoring the consequences of the Iran war, and there will come a moment when there’s a sudden realisation that they are badly mispriced. This is not unusual, occurring in mid-2007 when the liar-loans scandal in residential property had already surfaced and the S&P continued to rise. Today, this is even more of a credit-fuelled bubble, as FINRA’s statistics show:
This is not all the leverage in markets, reflecting retail speculation predominately. Hedge funds and similar large speculators go directly to the banks for their leverage loans. In total, the bubble rivals all precedents and as the madness of crowds is possibly more extreme than any in recorded history.
The point being made is that you cannot rule out a markdown in gold and silver when bond yields soar and equities crash, even though long speculation in the metals is minimal. The overspill from the carnage must not be casually dismissed. Optimistically, you could argue that this time is different, with central banks queuing up to buy gold, and silver is a needed critical mineral in short supply, with the Silver Institute confirming another year of substantial excess demand. Time will tell.
Meanwhile, the dollar’s trade weighted index has come under pressure, as the next chart shows:
Technically, with a death cross now in place the TWI is in a bear market. The level to watch is 96.8, represented by the lower pecked line. If that breaks, expectations of interest rate cuts can be dismissed. Next, we look at the yield on the 10-year UST note:
We’ve included the last few months’ detail in the vignette to show what is almost certainly a golden cross (death for prices). Technically, the 200-day moving average is still declining but only just. Otherwise, the yield can be expected to rise and test the upper trend line in the main chart before breaking out into new high ground.
When that happens, we can expect a second test for gold as hedge funds will be tempted to sell low-yielding paper gold for higher yielding treasuries.
If so, they will miss the point. Led by the dollar, all paper currencies will begin to lose purchasing power at a rate accelerated by the consequences of Hormuz being closed. But you have to ask yourself, will any setback be minimal with central bank demand increasing as unneeded dollars are sold?
Whatever the short-term uncertainties, it is becoming increasingly obvious that the fiat currency system is on its last legs and prescient investors will be buying into any dips — setbacks which will be trivial compared with what is to follow.
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