Gold getting overbought

The sharp rise in Comex open interest suggests short-term caution. But the background for gold’s outlook just gets better and better.

Gold and silver rallied this week, though this morning there is evidence of profit taking ahead of the weekend. In European trading this morning, spot gold was $2704, up $15 from last Friday’s close. And silver was $30.50, up 12 cents on the same timescale. Comex volumes in both were moderate.

Open interest in the gold contract has risen sharply, less so in silver. This is illustrated next.

While consistent with growing bullishness, to see gold’s Open Interest rise so sharply brings the risk of a correction with it. What we don’t know is the quality of buying: are they momentum buyers, or are they Managed Money buying on an assessment that the inflation outlook for the dollar is deteriorating, and the Fed is in a difficult position?

Monday will see Donald Trump’s inauguration as president, which will focus minds on the economic consequences of his proposed economic policies. It is commonly accepted that the US economy is growing, though this reflects a large and rising budget deficit and not genuine production. Trump’s tariffs and tax proposals and their consequences are now going to fill the headlines. It’s not hard to guess that higher consumer prices are on their way, which will lead to interest rates not falling as hoped, and potentially even higher bond yields.

This, in turn, justifies a strong dollar. This week the dollar’s trade weighted index paused, consolidating recent gains.

The dollar is likely to continue to be strong against other currencies, which is causing problems for the yen and euro, whose interest rates and bond yields have been left behind and may be forced to rise significantly. The obvious reluctance of the Bank of Japan and the ECB to condone higher rates is already weakening these currencies, with gold hitting new record highs priced in them.

Sterling bond yields already exceed those of the dollar, but with the British government on an economic suicide mission no further comment is required. Indeed, as the chart below illustrates, priced in gold (which is common law real global money) the entire fiat currency complex is losing value at an accelerating rate.

This is the reality of the global monetary situation and the context in which we must regard current market developments. Under President Trump, US inflation will rise driven by tariffs and his tax cutting policies. All major governments (Germany and Canada probably excepted) are highly indebted and cannot afford higher borrowing costs. Unless some miracle happens, the conditions for a fiat currency collapse are rapidly developing.

And finally, returning to the short-term, look at gold’s technical chart:

With Comex futures rapidly becoming overbought, further consolidation may be called for. But with Asian buyers in the market and ETF demand turning positive, any such consolidation is likely to be relatively minor. It is a situation where traders can lose money, but stackers should buy on dips.