Weak holders shaken out of PMs

Yesterday (Thursday) figures were released estimating that US GDP grew by 2.4% annualised in the second quarter, compared with expectations of 2%. Buoyant consumer demand is expected to defer any monetary easing by the Fed, so gold and silver were marked down sharply on the news. This morning in European trade gold was at $1948, down $13 from last Friday’s close after hitting $1982 before the GDP news. And silver is at $24.12, down 43 cents after a high of $25.14. 

On Comex, turnover in gold futures was high yesterday and Open Interest fell 13,194 contracts on preliminary estimates. The short-term bullishness since late-June has been mostly corrected, with the net long position of the Managed Money category (hedge funds) reduced. This is reflected in gold’s Open Interest, which is our next chart.

By this measure gold is certainly not overbought, telling us that the current setback should be read as a healthy correction. The background has been one of higher-than-expected interest rates, and a dollar that has moved sideways against other currencies. The dollar’s trade weighted index reflects the dollar’s current position vis-à-vis those currencies. This is next.

On balance, the TWI has not changed much this year so far. But in the days following Russia’s announcement that a new gold-backed trade settlement currency will be on the agenda for the August BRICS+ summit, the TWI broke down below the crucial 100.5 level, confirming that the pattern from end-January was a pennant flag likely to be followed by a significant move to the downside. The rally testing the 100.5 break is perfectly normal with a pattern of this nature, before the TWI continues to weaken.

Time will tell if this reading is correct, but the odds strongly favour it. However, this is just the dollar against other fiat currencies comprising the TWI. Nearly all of them face the same economic problems of a combination of a prospective recession, contracting bank credit, persistent consumer price inflation, and yet higher interest rates. The similarity with the troubles of the 1970s are striking but bewildering for market participants without that memory. 

Furthermore, the oil price is now rising, up 17% in the last month along with food staples. You can blame Russia, but inflation is a problem that just won’t go away.

In addition to the 1970s precedents, we can throw in additional factors, such as a military war in the Ukraine, sabre-rattling over Taiwan, and a financial war which is bound to devolve onto gold — the culmination of China and to a lesser extent Russia arming themselves with bullion before attacking the fiat soul of the western alliance. That soul is the need to fund the combination of spiralling budget deficits and debt accumulation by debasing their currencies.

These factors are increasingly likely to result in the end of the fiat currency era. Interest rates and the dollar’s TWI will become irrelevant. And the end of fiat means a return to the legal money of history — physical gold.