Short-term pain, long-term gain

A technical correction in gold and silver is shaking out weak holders, providing a stronger base for the next bull move.

There are strong signs that the credit bubble is beginning to deflate. A dramatic collapse in cryptos is leading the way, followed by momentum stocks on NASDAQ. This is bound to cause widespread liquidation in all financial asset categories, to be followed by the consequences of widespread portfolio reallocation away from risk. Financial violence is all part of the final act for fiat currencies as they shuffle off the stage.

A perfect storm, maybe. It is the ultimate justification for gold and silver stacking. But navigating through hurricane conditions may require considerable nerve.

Gold and silver corrected recent rises this week as shown in the headline chart. In European trade this morning, gold was $2862, down $78 from last Friday’s close after hitting a new peak of $2956 on Monday. Silver was $31.15, down $1.25 on the same time scale. Comex turnover in gold was moderate while in silver it declined from highish levels along with the price.

Gold is not overbought by any means, as shown by the chart of Open Interest on Comex:

In rough terms, I would take 450,000 contracts to be an oversold level and 600,000 overbought. At 508,807 (preliminary, last night) futures markets are broadly neutral. 

Bear in mind that March contracts and associated options run off the board or expire this week respectively, which must have been relevant. Meanwhile the stand-for-deliveries continue apace, with 301 tonnes of gold this year so far and 961 tonnes of silver. These so-called deliveries appear to be badly backlogged. 

For example, between May 2022 and October 2024, there were 39 million ounces of gold stood for delivery, yet the decline in warehouse stocks at 19 million ounces was only half that. The situation in silver is similarly backlogged. Admittedly, this doesn’t allow for other offsetting inflows, but it does indicate why the bullion banks panicked, driving up futures prices to substantial premiums over London spot.

Yet to be delivered gold and silver will undoubtedly fuel the next crisis on Comex. But for now, the most important factor is the bursting of the credit bubble, and nowhere is this more dramatically illustrated than in today’s tulipomania — bitcoin and cryptocurrencies generally. They are leading tech stocks down into the abyss.

The danger of crypto-based wealth destruction should not be underestimated. In particular, Trump-related cryptos have collapsed almost entirely. $Trump is down over 80%, and Melania Trump’s meme coin by over 90%

Cryptos are widely held, fuelled entirely by fiat credit and estimated to have recently had a combined worth of $3 trillion. NASDAQ has been fuelled by associated speculators leveraging their positions as shown in my next chart, of margin debt which at end-January was at record highs of $937.3 billion, just exceeding the previous high in October 2021

While it is still in its earliest stages, driving the collapse of credit is a growing realisation of the consequences of renewed trade tariffs. President Trump announced the immediate imposition of 25% tariffs on Canadian and Mexican imports, 25% tariffs on the EU, and a doubling of tariffs on China. Clearly, the consequences of these tariffs will undermine the global economy and force up US consumer prices. Consequently, Elon Musk’s attempts to control waste in Federal spending, which is already undermining private sector confidence, will be swamped by a tariff-induced slump and the consequences of substantial cuts in government contracts.

The combination of a credit bubble coupled with punitive tariffs is promising to collapse global trade and repeats the conditions that led to the Wall Street Crash and the Smoot-Hawley tariff Act of 1930 which fuelled the 1930s depression. This time the combination could be even more vicious, undermining credit values considerably more than those reflected in the dollar’s 1934 devaluation against gold.

That is the point. With the prospect of extreme financial value destruction, safety in terms of wealth conservation is to get out of credit into real money, which is gold, and to just ride it out.