Look at what is happening behind the scenes in the gold and silver markets.
March 13 (King World News) – Alasdair Macleod: Gold and silver on pause as funk-money flies to $US. It is becoming clear that Iran is no push over and the economic consequences of this war are dire, with oil at $100 and going higher.
The background to this week’s market report is spreading consequences of the joint US—Israeli attacks on Iran, with Iran effectively closing off the Hormuz bottleneck and spreading drone attacks throughout the region. Capital markets are trying to adjust to the economic and financial consequences of an oil price increasingly likely to be higher for longer.
This week, gold and silver were down on balance, gold marginally and volatile silver more so as missiles and drones in the war against Iran appeared to fly in increasing numbers. In early European trade this morning, gold was $5095, down $76 from last Friday’s close. Silver at $83.30 was down $2.75 over the same time scale.
Comex silver futures are running on vapour, with volumes declining to negligible levels, while open interest remains at 20-year lows, demonstrating a total lack of speculator interest. This is shown next:
Meanwhile, silver has been progressively withdrawn from Comex vaults and the level of registered for delivery stocks has declined to 15,720 contracts against an open interest of 115,854. Furthermore, someone has been accumulating April contracts, which with outstanding March contracts total 2,847 this morning. This can only be with the intention of standing for delivery.
Silver liquidity continues in short supply in London and Shanghai. However, the Shanghai price is down slightly this morning at $94 with a premium over London spot maintained at about 13%. Despite this, backwardation has existed in Shanghai futures during the week:
It is Friday 13th after all
When markets are surprised by bad news, the tendency is for global liquidity to fly into the dollar, and we see this reflected with the trade-weighted index which has risen sharply in recent days:
It is only when the initial panic is over that more rational thoughts feed into prices. The course of the war which was originally going to be little more than a week in duration is a shock for complacent investors. Despite global agreements to draw on strategic oil reserves in an attempt to counter the shortfall from the Gulf, analysts are awakening to the reality of higher oil prices for longer, and the consequences for consumer prices. Worse still, there are increasing signs that Western economies are stagnating, a horrible combination which reverses interest rate prospects and clobbers market values.
Bond yields have started rising again to alarming levels. The UK 10-year gilt yield has risen nearly 50 basis points at a time when the UK economy is flatlining, and the UK government was banking on lower interest rates. And Germany’s yield this morning is in new high territory while their economy is in dire straits. These charts are next:
The scale of the war disaster is only beginning to be discounted in markets. It is said that oil feeds into 45,000 products, and an oil shock which could turn out to be the greatest in modern history will push up prices across the board, collapsing the purchasing power of currencies. No wonder bond yields are rising and will have much further to go. And logistics are also mess, with ships displaced and bunkers locked up in the Gulf creating fuel shortages.
Monetarists and Austrian economists tell us that it is not the oil shock that drives up inflation, but the expansion of credit to pay for it. That being the case, clearly central banks will expand their balance sheets to make the credit available. Commercial banks are already facing a private credit crises and deteriorating economic outlooks, so will probably sit on their hands, calling in loans where they can.
From being relatively benign, the outlook is now of a massive expansion of currency and currency reserves, accompanied by soaring bond yields and equity bubbles popping. It is the classic combination leading to imploding asset values, economic depression, and soaring consumer prices. The post-Bretton Woods fiat currency system is more visibly about to be tested and its failure a realistic possibility.
Once the current short-term flight into the perceived safety of the dollar is over, gold and silver will be the only safe havens. And the rush into them will be a wonder to behold!
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