Dollar down, gold up
The dollar’s trade weighted index just hit multi-year lows. To make things worse, Israel attacked Iran overnight, escalating ME tensions. Comex gold is waking up to the implications
Alasdair Macleod
Last week, it was silver.
This week it is gold.
In European trade this morning, gold was $3416 having hit a high of $3443 in Asia overnight, up $112 on last Friday’s close.
Silver was $36.25, below its Monday high of $36.88, up 23 cents on balance over the same timeframe.
That leaves the gold-silver ratio at 94.
We have seen the remarkable dichotomy of gold close to all-time highs while open interest on Comex has indicated that futures remain oversold.
That is beginning to correct as the next chart shows, but this contract is still in oversold territory:
Overnight, Israel attacked Iran’s nuclear facilities, seemingly to force the US into joining it in a new war against Iran.
The situation is likely to escalate.
Non-essential US personnel have been evacuated from Iraq and other bases in the region and oil prices have spiked, WTI hitting $77.60 overnight, up from under $56 in early-May.
This could be the wake-up call for US hedge funds to buy gold futures, the oversold position being due to their non-participation so far in gold’s recent strength.
This contract’s open interest has the potential to expand by 150,000—200,000, which would drive gold considerably higher and cause serious pain for the shorts.
The other factor coming into play is foreign selling of the dollar, whose TWI looks very bearish:
According to US Treasury TIC figures for March, foreign ownership of dollars and underlying financial assets total $39.6 trillion.
That is a measure of selling pressure, and it’s even causing officials at the ECB to speculate that the dollar’s misfortune could lead to a greater international role for the euro.
Maybe, but it seems almost certain that risk-off for the dollar is risk-off for all fiat currencies, benefiting currency exchange rates with real money without counterparty risk, which is gold.
The next chart shows gold’s technical position.
It has been consolidating its record-breaking rise to mid-April, but now looks ready to challenge the $3500 level seen briefly on 22 April:
The position in silver is different.
On Comex, there has been an understanding that it had been left behind, so the longs appear to have been piling in, leading to it being technically overbought:
Appearances are a little deceptive, because the hedge funds (managed money) are net long but not overly so:
Charts of the Other and Non-reportable categories tell a similar story.
The difference is that the Producers are not increasing their short positions as open interest rises, throwing the short burden onto the Swaps.
This was the Swaps position on 3 June, since when open interest has risen by over 13,000 contracts.
The extra open interest since these commitment of traders’ numbers will almost certainly drive net swaps into a record short position, which on a rising silver price will represent a squeeze on them of 250 million ounces, or $9 billion dollars.
We live in interesting times, as the Chinese would say.
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