Explosive performance for PMs

On the back of a weakening dollar, gold and silver prices rallied strongly again this week. In European trade this morning, gold was $1800, up $54, and silver gained 38 cents to trade at $22.74. Since mid-October, gold has gained $173, and silver $4.50. With such bullish moves, one would have thought that Comex volumes would be high, but in both metals they have been modest.

Furthermore, Open Interest has fallen to new lows, as the next two charts illustrate.

Because we can link Open Interest to speculator bullishness, it is clear that these markets are driven by bear closing and the bulls are yet to buy. 

Technical analysts will argue that having rallied to test the 12 month moving average, a correction is now due. This is likely to generate some profit taking from the few bulls, abetted perhaps by chart-watching Swaps. But after a brief pause perhaps, we can expect further moves to the upside. 

Admittedly, gold has some way to go before breaking out of its 27-month consolidation. Driving wrong-footed bears is the continuing collapse of the dollar’s trade weighted index, which is next.

Indeed, the rise in the gold price has done little more than reflect the fall in the dollar. At the same time, the fall in bond yields has been spectacular, as our next chart shows.

So why have the dollar declined and UST yields fallen? The answer is that having led other central banks towards higher interest rates, they have now followed the Fed, removing the source of their currencies’ relative weakness. And sensing recession, the markets are now anticipating a softer US interest rate outlook. The slowdown in monetary growth can be expected to lead to a reduction in the rate of consumer price inflation as well.

There are also tentative indications that peace talks between the US and Russia to try and achieve resolution of the Ukraine situation might begin. And if they actually do take place and an agreement is reached, presumably sanctions against Russia might be eased. That being the case, energy prices would likely soften, and market optimists can begin to dream of lower interest rates.

For now, this is just pie-in-the sky. But one can see how the merest suspicion of a peace treaty could be positive for bonds, negative for the dollar, and positive for gold.

Turning to silver, we can see that a combination of industrial demand and strong demand from India is forcing industry analysts to revies their estimates of shortages for 2022 and the next few years as well. Reflected in local premiums, Indian demand is so strong that bullion is being flown in, as opposed to being shipped by sea. With ETF demand side-lined, this is leading to substantial withdrawals of bullion from Comex and London vaults, down about 400 million ounces so far this year.

These conditions are likely to persist into 2023 and beyond. Will this be the trigger for another nickel-like event in silver?

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