Gold and silver higher, helped by a weaker dollar

OUTSIDE MARKET DEVELOPMENTS: The Iran war continues to escalate after U.S. forces struck five Iranian tanker ships near Kharg Island in response to Iran's ongoing attempts to hit U.S. warships with missiles. Iran retaliated by launching a barrage of ballistic missiles at a U.S. airbase in Jordan. This will assuredly beget retaliation from America, and the cycle continues.

Brent crude surged to four-month highs above $100. Ultimately, this feeds the inflation loop, but at this point the trade seems to be waiting for hard inflation data later in the week. August PPI comes out on Thursday, while CPI will be released on Friday. For now, the probability of a September rate hike is holding steady around 60%.

The dollar index slipped to a three-week low before rebounding modestly ahead of the August low at 98.56. The greenback is under pressure from a stronger yen, driven by rising expectations of a BoJ rate hike next week, comments from U.S. Treasury Secretary Bessent warning traders not to bet against the yen, hints of potential further intervention, and the related unwinding of yen-funded carry trades.



Mounting U.S. fiscal concerns are certainly a headwind for the dollar as well. The national debt is now in excess of $40 trillion, and debt servicing is over $1 trillion. This puts the Fed in the awkward position of having to weigh inflation-fighting against the risk of making Washington's fiscal math even worse.

If the Fed were inclined, it could "inflate away" the debt by allowing loose monetary policy and/or increasing the money supply. However, this shifts the cost onto anyone holding dollars, as inflation and a weaker currency eat into their purchasing power.

In encouraging the Fed to ease – or at least remain accommodating – the Trump administration hopes that growth will be enough to outrun the debt, since a bigger economy makes existing debt easier to carry relative to GDP. It is also a serious test of Fed independence. The risk, of course, is that cheap money without matching growth stokes inflation instead, leaving the debt burden and the dollar's value both worse off. 


GOLD

OVERNIGHT CHANGE THROUGH 6:00 AM CT: +$44.12 (+1.01%)
5-Day Change: +$9.15 (+0.21%)
YTD Range: $3,945.52 - $5,595.02
52-Week Range: $3,614.69 - $5,595.02
Weighted Alpha: +13.45

Gold is rebounding, spurred by a weaker dollar and heightened haven interest amid escalating Middle East tensions. Price action remains confined to last week's range, with the trade shrugging off the inflationary implications of $100+ oil and awaiting PPI and CPI data later in the week.



There is some hope that the impending inflation data for August will provide some clarity about the Fed's next move when the FOMC convenes next week. Barring a major upside surprise, and despite the hawkish bias in Fed funds futures, I still think the Fed is most likely to remain on pause.

If that is indeed the case, the longer-term uptrend in gold should resume asserting itself. A climb back above the 20-day moving average would confirm potential for a challenge of last week's high at $4,510.64. Above that, the 200-day MA at $4,541.35 and the August high at $4,696.31 would be back in play.

Central bank buying, driven by reserve diversification (dedollarization), has been a major force behind the rally in gold. Movements of existing official-sector gold reinforce the rationalization.  

The Dutch central bank moved 86 tonnes of gold from New York and Ottawa to London between March and August, framing it as "crisis preparedness" amid rising geopolitical tensions. Gold held at the Bank of England is considered the world's most tradable and quickest to deploy if needed. However, some view the move as a sign that even close allies want their reserves further from U.S. jurisdiction.

France finished removing its gold from the NY Fed early this year, and all 2,437 tonnes (the world's fourth-largest reserve) is now on French soil. Germany repatriated all of its gold a decade ago.

Hot inflation prints could drive more hawkish Fed bets, underpin the dollar, and weigh on gold. Today's overseas low at $4,341.96 reinforces the significance of the 100-day MA. If this support area gives way, a retest of last week's low at $4,283.60 would become likely.


SILVER

OVERNIGHT CHANGE THROUGH 6:00 AM CT: +$0.480 (+0.73%)
5-Day Change: +$0.774 (+1.18%)
YTD Range: $54.778 - $121.630
52-Week Range: $40.734 - $121.630
Weighted Alpha: +35.76

Silver has reached fresh two-week highs, bouyed primarily by weakness in the dollar. The white metal is up more than 2% this week, whereas gold is still modestly lower on the week.



Last week's solid NFP print suggests a resilient labor market and implies persistent strength in the broader, consumer-driven economy. This durability may be sufficient to sustain household spending on electronics, jewelry, and other silver-containing consumer products, especially as Christmas buying ramps up, thereby supporting demand for the metal.

Today's tests back above the 100-day moving average are encouraging, but I still believe $80 must be regained to return confidence to the underlying uptrend. Last week's high at $71.104 and the rising 200-day MA at $73.130 provide key intervening barriers.

On the downside, I'm watching the 20-day moving average at $66.637 on a close basis. Today's Asian low at $65.521 and Monday's low at $65.414 protect Friday's low at $64.779 and last week's low at $63.325. 


Peter A. Grant
Vice President, Senior Metals Strategist
Zaner Metals LLC
312-549-9986 Direct/Text
[email protected]
www.zanermetals.com

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