PREPARING FOR LIFTOFF! / MACLEOD FINANCE

Preparing for liftoff!

Gold and silver are ready to break into new highs as investors increasing lose faith in the dollar. Bear squeezes in gold and silver are now driving prices, which look set to move higher.

Alasdair Macleod

For decades, the expansion of artificial supply in the form of paper derivatives has been used to keep gold and silver prices subdued. 

Could it be that it is beginning to be reversed, as gold leasing declines, and the shortage of physical supply particularly of silver begin to bite? 

And could this be compounded as evidence mounts of debt traps being sprung on G7 governments in the major currencies, leading to an escalating loss of faith in their values?

Gold and silver were both firm over the week, with gold in European trade this morning at $3410, up $40 on the week, and silver at $38.95 was barely changed. 

Prices this week peaked yesterday, but opening levels this morning were only marginally lower. 

Comex volumes in gold were subdued, but higher in silver.

Perversely, open interest in silver has declined, while the price rose. 

This is illustrated next:

Clearly, the shorts are being squeezed and are being forced to reduce their exposure to a market which the financial consensus is beginning to suspect is underpriced. 

For example, through its central bank a Saudi wealth fund invested $40m in silver and silver mining ETFs recently. 

And only this week the US Department of the Interior has included silver in its latest draft list of critical minerals, which is likely to confirm buying by financial institutions.

These developments are indicative of changing institutional sentiment towards silver, realising the greater danger is to be short instead of long.

Silver’s multiyear high of $39.30 only a month ago should not prove to be an obstacle to higher prices. 

The problem for the paper shorts is that in the face of rising physical demand there is little chance of them closing their positions. 

Liquidity is drying up at a time when momentum traders are likely to start buying futures and forwards. 

While the shorts will be reluctant to do so, the only solution open to them is to bite the bullet and let prices rise to a point where liquidity returns. 

This is confirmed by the bullishness of silver’s technical chart:

Adding to the silver shorts’ misery is the position in gold. 

As with silver, there is a developing squeeze on Comex futures:

In this case open interest collapsed as gold began to make new highs back in April, falling to oversold levels and barely recovering since. 

At the same time, gold has stubbornly refused to correct lower, indicating strong and persistent support in a pattern best illustrated in the technical chart which is repeated here:

This flat-topped pennant is a very bullish pattern, indicating rising support taking out profit-takers and leaving the market short of sellers. 

When it breaks above its supply line at $3440, experience of pennant patterns tells us that that the price will rise quickly to mirror the move in as a minimum objective — in this case $900+, possibly by the year end.

Again, we can see the difficulties this is already causing Comex and London. 

Recent up-days have been during their trading sessions, while prices have tended to pause in Asia overnight. 

Quietly, as well as central banks and sovereign wealth funds some big funds are beginning to accumulate bullion. 

Gold stand for deliveries on Comex so far this year are 878.3 tonnes, and net investment in physical ETFs is becoming consistent, albeit still at subdued levels. 

But when momentum traders get hold of this contract there can be no doubt about prices moving far higher.

The economic conditions driving gold, silver, and also other commodities have become obvious to an increasingly wide audience this week. 

The persistent increases in term debt yields are drawing attention to the political impossibility in all G7 nations of reducing budget deficits, while their economies stall. 

These are the conditions when debt traps lead to far higher interest rates and bond yields, destabilising the entire fiat currency system.

With respect to the dollar, Trump is applying enormous political pressure on the Fed to reduce interest rates and is on record demanding a lower dollar. 

So far, the foreign holders of some $40 trillion do not appear to have taken these threats seriously. 

As they return from their summer breaks, that is likely to change.

In conclusion, my last chart is of the dollar’s TWI. 

Which is leading the other major currencies lower: