Market Report: Signs of gold leaving $1800 behind - Research

Gold and silver tracked higher this week until today when both metals were slammed. At the time of writing gold was off $14 on the day and silver down 62 cents. There is no obvious reason for it, so we can only assume that vested interests are behind this move.

On the week, gold is slightly up, about $6 from last Friday’s close at $1815, but silver is down by 35 cents at $25.70. Physical liquidity in both metals remains constrained. Trading on Comex was moderate, but open interest in the gold contract is rising, which is our next chart.

Three weeks ago, open interest bottomed at 449,729 contracts, as a proxy for an oversold market indicating a negative market sentiment from which it could only begin to recover. Gold was beginning to escape the $1800 bound, creating potential difficulties for the Comex Swaps, who according to the last COT figures (6 July — update due tonight for 13 July) are gross short $40bn, net $28bn. This is our next chart.

For the Swaps, these positions appear intractable. And they come at a time when Basel 3 is changing their world. Last Friday, the UK bank regulator, the Prudential Regulation Authority, released its final draft rulebook. The LBMA interpretation was confused, to say the least. But the new rules are quite clear: that LBMA member banks can continue to offer gold deposit accounts only if they are fully backed by gold. Instead, the LBMA, having claimed that unallocated gold is the equivalent of physical gold, is now claiming that as derivatives there is only a haircut of 5%. But that concession only appears to apply to net sold contracts for central clearing counterparties.

A fuller explanation of the issues is found in this week’s Goldmoney Insight, in the section headed “A confusing response from the LBMA”.

Other market factors appear to be treading water. The next chart is of the 10-year US Treasury yield, which has fallen back to its 200-day moving average, a normal technical correction before yields can be expected to rise again.

The dollar’s TWI is similarly consolidating a rally. And as proxy for the commodity complex, the Invesco DB Commodity Tracking fund is moving sideways as well.

Yet at the consumer level, prices are not only rising more than generally expected but the hope that these rises are just transitory is fading.

This, is of course, bullish material for precious metals. The only snag, which is bound to be played on by the shorts, is that with rising consumer prices comes rising interest rates, which makes it more expensive to hold gold. The argument is founded in Keynesian ignorance of money, but it is the Keynesian clique which is short of precious metals, and they are likely to push it for all its worth.

But all bull markets are walls of worry, and gold appears to be gradually conquering the $1800 barrier. If it clears it, there will be plenty of hedge fund traders ready to jump on the bullish bandwagon.

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