Gold glows and silver shines

The developing conflict between Israel, Iran, and its proxies is escalating and America is being drawn in. Middle Eastern demand for gold over dollars is only just starting to impact bullion markets.

Both gold and silver consolidated in a tight range close to all-time highs this week. Spot gold traded at $2660 in European trade this morning, up $3 from last Friday’s close, and silver was $32.05, up 43 cents on the same timescale. Comex volumes in both metals declined over the week, consistent with a consolidation. 

The passing of October Comex contracts has led to a jump in gold stands-for-delivery, amounting to 10,840 contracts representing 1,084,000 ounces (32.6 tonnes) in the last four trading sessions, and 1,155 silver contracts representing 5,775,000 ounces (179.6 tonnes).

Interestingly, there is evidence of overnight Asian demand returning, which is likely to be from the Middle East given escalating tensions in the region. This week has seen attacks and a ground invasion by Israel into Lebanon attacking Hezbollah, and a missile attack by Iran against Israel. At the time of writing, we await the Israeli’s response, thought by many likely to be an attack on Iran’s oil refinery at Abadan on the Shatt al-Arab. An escalation of this sort would certainly drive oil prices sharply higher, because the Hormuz Strait would be effectively closed because cargos would be uninsurable.

WTI crude jumped 11% from its low on Monday morning to $74.30 today, reflecting these concerns. But it appears that wider financial markets are sleepwalking through a rapidly developing Middle East war. The assumption appears to be that America is not involved, so there’s nothing to see. But as informed commentators, such as Gilbert Doctorow now points out on his Substack, America supplied the two-tonne bombs dropped on Beirut on locations guided by US intelligence and by US AWACS early warning systems. The US appears to be very much involved, albeit covertly, and the situation is likely to deteriorate rapidly.

Market complacency is bound to be shattered. And this week saw the dollar’s trade weighted index recover some of its poise, bouncing off the crucial $100 level. This is my next chart.

There is little evidence of a war-driven flight into the dollar. The Bank of Japan signalled there’s no rush to raise rates further leading to a sharp fall in the yen. Furthermore, Andrew Bailey of the Bank of England indicated that the bank might cut rates aggressively if inflation continues to decline, knocking sterling down by a few cents.

Against a stronger dollar in forex markets, gold has held its poise. It is no longer as overbought as it has been recently, with Open Interest on Comex declining by 35,848 contracts in the last eight trading sessions while the price has held. And the tightness of physical supply facing renewed Middle Eastern demand is set to drive gold prices higher in the coming weeks, despite the dollar’s TWI.

Silver is also behaving strongly. We should not forget that in living memory silver circulated widely as money in the Middle East and other Asian regions. Adding growing monetary demand to four years of supply deficits and the price effect promises to be explosive. I shall end with silver’s technical chart to remind readers of how bullish this set up looks technically.