HEALTHY CONSOLIDATION IN GOLD AND SILVER / MACLEOD FINANCE

Healthy consolidation in gold and silver

After the post-liberation day volatility, all markets seek direction. However, the signs are that the negative trend for equities and bonds, and positive trend for PMs will continue in time.

ALASDAIR MACLEOD

This week, consolidation has continued for gold and silver. 

In early European trading this morning, gold was $3321, up $83 from last Friday’s close after hitting a high of $3438 on Tuesday. 

Silver was $32.58, up 60 cents over the same timescale. 

Trade on Comex was light to moderate, with the price action being increasingly driven in Shanghai.

Gold having risen strongly this year so far (up 26%) and particularly over the last month, it appears that Chinese speculators on the Shanghai Futures Exchange are suffering mild market indigestion. 

This sets the scene for Comex shorts, still trying to close their positions encouraging the longs to sell by marking down prices to trigger stop-losses.

But Open Interest in both contracts are at the low end, indicating that weak holders have already left the Comex scene. 

This is shown in the next chart for gold:

Note how open interest is now below 450,000 contracts — on preliminary figures last night they were 439,672. 

Despite the collapse in this metric, the price remains close to all-time highs. 

Call this the China effect: it illustrates that the influence brought to bear on gold in Western paper markets is now not the real game.

So we must look to China. 

And here, a pause in gold’s upwards momentum is justified by confirmation that Trump’s tariffs are being eroded, in China’s case through back-channel negotiations. 

Yesterday, new tariffs were agreed between the UK and the US, confirming that the US is tending to back down. 

It gives comfort to US investors as well, who believe that the Art of the Deal is alive and well. 

The dollar’s trade-weighted index reflects this accordingly:

Currently at 100.5, the $TWI has rallied into overhead supply. 

This is likely to be seen by foreign holders as an opportunity to reduce their exposure. 

By way of confirmation, the Fed kept its funds rate unchanged, as expected. 

The Fed will be very much aware that to have trimmed the rate would have increased selling pressure, not just on the dollar, but on Treasuries as well.

Meanwhile, China is still easing its monetary policy, which can only stimulate household demand for gold accumulation accounts, with some $2.5 trillion equivalent of new money to invest annually. 

That’s what tells us gold’s consolidation is just that, prior to new Chinese investing in physical set to push prices significantly higher.

Silver is also showing a steadier tone. 

Again, Comex open interest is at the low end, illustrated next.

Open interest (arrowed) shows that all else being equal it could go slightly lower. 

Ideally one would like to see it below 130,000 contracts (139,214 preliminary numbers yesterday). But does this really matter?

The technical chart suggests not. 

This is next.

This is very bullish, which suggests that Comex Open Interest should be on a rising trend: that is to say selloffs become less extreme as time goes on. 

Undoubtedly, it is this chart and similar technical representations which make the silver bugs so bullish. 

Bear in mind that silver bugs are far from being the mainstream opinion, vociferous though they may be.

The mainstream dismisses reports of excess demand over supply, pointing out that there are large stocks of silver classified as “investment”. 

In the past, this has often been the source of marginal supply.

Maybe. 

But silver investors are unlikely to let their silver go if they see prices rising. 

And that’s what the technical chart is screaming at us.