Gold testing $2600

After a bullish performance last week which took gold to new highs, will it hold on to them, or is a correction overdue? Read on…

This week, gold and silver consolidated recent rises with gold trading at $2608 in early European trade, up $35 on the week after last week’s spectacular rise. And silver traded at $31.15, up 45 cents on the same time scale. Comex volumes were moderately healthy, with a noticeable increase in turnover on Wednesday, when the Fed cut its funds rate by 0.5% spurring significant volatility.

Chairman Powell’s remarks were contradictory. He claimed that inflation was being conquered. He said that the US economy is in great shape and that the labour market is in a solid condition. Accordingly, he downplayed further interest rate cuts, subject to further confirmation on inflation and the course of the economy. 

All this seems disingenuous, because there is no way with escalating budget deficits that inflation is licked. To argue otherwise flies in the face of all economic history and reasoned analysis. And the belief that the US economy is still strong shows a touching belief in his own government’s statistics which inflates GDP by excess government spending over tax receipts. One can only conclude that ahead of the US presidential election that politics are involved.

The first reaction on Wednesday’s larger than widely expected rate cut was a defensive markup taking spot gold to just under $2600. And when the buyers didn’t follow through the bullion banks bashed the price, taking out stops down to $2547 before a slight recovery into the close.

Foreign buyers were not deterred. Their overnight buying on Wednesday night EST following the markdown led to a significant rise ahead of yesterday morning’s London fix, taking the price back up to $2595 as overnight Asian buying was unwound. The next chart of half-hourly bars illustrates the action, starting with the post-FOMC statement mark-up, followed with the mark-down to $2549, and the subsequent recovery.

Notice the relationship between price and volume, particularly at the action covered by the two arrowed lines. In a second attempt at a price knockdown two hours after London’s morning fix at 0830 EST (the start of the arrowed lines, volume shot up as buyers came in. The price recovered and then held firm as volume diminished. In other words, selling pressure was drying up.

A technical analyst would say that this chart shows a bullish cup-and-saucer action ahead of today’s trading. It illustrates that the bulls are using price dips to buy, squeezing the shorts.

The problem the bullion banks has is they cannot close their shorts without driving the price higher. The next chart shows this problem in $ billions on Comex.

The Swaps are mainly comprised of bullion bank trading desks, and with gross mark-to-market exposure of over $3 billion on average, the shortage of physical bullion is putting the squeeze on them. If the squeeze continues, then control over gold prices will be lost, to be replaced by a bear squeeze on the establishment. We don’t know their position in London, but they are almost certainly short there too in aggregate, particularly where they offer customers unallocated gold accounts.

The technical position continues to look impressive, as the next chart shows:

In conclusion, it appears that $2600 is not a significant hurdle and price rises have further to go in the short-term.