GOLD AND SILVER BULLISH / MACLEOD FINANCE

Gold and silver bullish

There’s growing appreciation that the gold and silver bull has returned, though the reasons justifying it may not be apparent. But this week’s price action is an important turning point.

ALASDAIR MACLEOD

There are important factors in the background driving the relationship between monetary metals, the dollar, and the other major G7 currencies. 

These include geopolitics: this week saw plans advancing for a non-dollar (and G7) currency area incorporating the Shanghai Cooperation Organisation, BRICS, and those nations in the queue to join, representing 70% of the world’s population. 

Additionally, there is a developing G7 bond crisis as the debt bubble hits the buffers. 

And technical analysis tells us that gold and silver prices are going potentially far higher.

Gold and silver appear to be front-running major changes in the relationship between G7 currencies and the consequences of these tectonic shifts. 

It is in this context that this week’s performance should be read.

Gold and silver chose a four-day week in the US (Monday was Labor Day) to break out of holding patterns, putting a dramatic squeeze on Comex futures. 

In European trade this morning, gold was $3550, up $102 from last Friday’s close, and silver was $40.77, up $1.02 over the same timescale.

Having been subdued since early-April, Comex open interest in the gold contract increased by about 50,000 contracts as momentum traders in the managed money category began to buy. 

With the relationship to price, this is shown in our next chart.

This is a return to normal bull market conditions, with buying rather than short covering driving the price.

However, the swaps will be careful not to be squeezed, raising prices to discourage buyers. 

We can only assume that their short positions on Comex are roughly covered by long positions in London’s forward market. 

Less commented on are the shorts in the speculator categories. 

The latest COT report (26 August) showed 33,577 managed money shorts, 27,879 other reported shorts, and 20,058 non-reported shorts for a total of 81,514. 

Some of these are bound to have been closed since that date, but what remains will be suffering pain.

To summarise, the set up remains bullish with plenty of shorts yet to be squeezed into covering. 

Furthermore, the fiasco earlier this year at the Bank of England’s vault will have convinced central banks to desist in leasing activities, so physical liquidity will remain extremely tight, as the declining trend of vault data from the bank illustrates:

The technical position is bound to encourage more speculative buying, and this chart is next:

The chart pattern is unequivocally bullish, with a minimum projection to $4,300. 

As to why this is justified on fundamentals, momentum traders are unlikely to care. 

But political pressure on the Fed to reduce rates coupled with a stalling economy plus increasing price inflation is probably enough reason for most.

Additionally, stubbornly high long bond yields in the US and elsewhere forces central banks to fund government debt at short maturities. 

While lower interest rates will reduce funding costs in treasury bills, it means that increasing quantities of debt need to be rolled over in addition to new funding. 

Long term, this is bound to be a problem. 

Short term, it encourages the Fed and other central banks to cut rates as much as they dare, which undermines the currency and increases gold and silver prices.

Silver’s chart is equally bullish with the breakout obvious:

Furthermore, there is the prospect of the gold/silver ratio declining. 

The g/s chart tells us very little, but as gold rises, on average silver rises almost twice as fast. 

Furthermore, the decline of the fiat dollar as the world’s reserve currency should draw increasing attention to silver’s monetary qualities, pushing the gold/silver ratio considerably lower. 

With gold at $4000 and a ratio of 50, that makes silver $80. 

This is not a forecast, only an illustration of silver’s potential.

Finally, the dollar’s trade weighted chart shows the dollar poised for its next move down against other currencies, principally the euro and yen, hardly paragons of virtue themselves:

A move lower with lower interest rates is Trump’s stated objective and that of the so-called Mar-o-Largo accord devised by Stephen Miran, whose appointment to the Fed’s board is before Congress.