Gold and silver poised for third straight lower weekly closes

Outside Market Developments: U.S. consumer inflation data were largely in line with expectations. CPI rose 0.4% in August on expectations of the same, versus +0.1% in July. The annualized rate held steady at 3.4%. Core CPI rose 0.3%, above expectations of +0.2%, versus +0.2% in July; +2.4% y/y, unchanged from July.

The CPI data is benign but still sticky above target, and I expect higher energy prices to start percolating through to consumers this month. Headline PPI for August accelerated to 5.4%, above expectations of 5.3%, up from 4.8% in July.

Hotter inflation in August (and into September) was largely driven by the rebound in oil prices as fighting between the U.S. and Iran intensified. Brent crude hit a four-month high above $111 in earlier trading today, before retreating into the range.

Perhaps most significantly, diesel fuel prices in the U.S. have reached record highs above $6 per gallon. This will drive up shipping, grocery, and goods prices for months as higher freight costs cascade through the entire supply chain.

Taking the overall inflation picture into account, traders drove the probability of a rate hike next week to 85%. That's up from 72.4% yesterday, 59.4% a week ago, and 48.4% a month ago. Fed funds futures now imply 44 bps of tightening by year-end.

10-year Treasury yields traded above 5% for the first time in nearly three years. The dollar index jumped to new highs for the week before moderating later in the session. Yen strength in advance of next week's anticipated BoJ rate hike – and ongoing veiled threats of intervention – continues to pose a headwind for the dollar, as does America's worsening fiscal situation.

I maintain a healthy degree of skepticism about a rate hike at the September FOMC meeting, despite today's action in Fed funds futures. Given the 9-3 vote in July, are the subsequent data sufficient to garner four more hawkish votes? It strikes me as a heavy lift for the hawks. Even if Chairman Warsh is swayed this time, can he build the necessary consensus?

All that remains to be seen. I would suggest $6+ diesel could be a significant tipping point if the Fed is inclined to try and get out in front of those price pressures. Additionally, this week's ECB rate hike and the expected BoJ rate hike give the Fed a little more leeway for tightening.

Next week's focus will be squarely on policy decisions by the Fed (16-Sep) and the BoJ (18-Sep). Given this week's oil price surge and August's inflation data, the trade now favors a 25 bps Fed rate hike. The BoJ is widely expected to raise its policy rate from 1.00% to 1.25%, and signal that further tightening is likely. 


GOLD

OVERNIGHT CHANGE THROUGH 6:00 AM CT: +$20.89 (+0.48%)
5-Day Change: -$2.363 (-3.57%)
YTD Range: $3,945.52 - $5,595.02
52-Week Range: $3,626.99 - $5,595.02
Weighted Alpha: +11.02

Gold initially dipped to a new low for the week below $4,300 in reaction to today's CPI print. While the yellow metal subsequently firmed to set fresh intraday highs above $4,400, a third straight lower weekly close appears likely.



Despite the market pricing in a strong likelihood of a Fed rate hike next week (85-90%), gold remains confined to the previous week's range when that probability was less than 60%. Persistent dollar weakness is providing some underpinning for gold. The dollar index is poised for a second consecutive lower weekly close amid yen strength and mounting fiscal concerns. 

Despite the rise in rate-hike jitters, gold may be quietly reasserting its classic role as an inflation hedge. Amid sticky inflation readings, ongoing geopolitical energy shocks, and rising worries that dollar devaluation is the "easy" path to address massive debt, the yellow metal may once again show its value when real purchasing power is under siege.

Metals Focus notes that official sector gold demand recovered in July and August "as diversification drivers persist." The Precious Metals Weekly went on to note that "expansionary US fiscal policy and concerns over the Fed’s independence have further undermined confidence in both the dollar and US Treasuries."

Gold as a reserve asset carries zero counterparty or default risk and cannot be debased by any government’s fiscal or monetary policies. Sounds pretty appealing. If such diversification is smart for global central banks, it's smart for individual investors as well.

A close today above the 100-day moving average at $4,335.49 would be somewhat encouraging. Today's early U.S. high at $4,402.05 protects the highs from earlier in the week, from $4,432.14 to  $4,442.87. Above that, more important resistances are marked by the 20-day MA at $4,463.19 and the previous week's high at $4,510.64.

Today's intraday low at $4,296.89 now provides a solid intervening barrier ahead of last week's low at $4,283.60. The latter will correspond closely with the rising 50-day MA early in the new week. If gold sets new lows for September, the $4,232.32 Fibonacci level would be back in play.


SILVER

OVERNIGHT CHANGE THROUGH 6:00 AM CT: +$0.268 (+0.42%)
5-Day Change: -$2.363 (-3.57%)
YTD Range: $54.778 - $121.630
52-Week Range: $41.142 - $121.630
Weighted Alpha: +29.35

Silver is trading higher on the day, but initially fell to a three-week low as rate ike expectations surged in the wake of today's CPI data. Despite the intraday rebound, the white metal is likely to notch a third straight lower weekly close.



Silver may be garnering some underpinning from the broad commodities rally that has pushed major commodity indexes to multi-year highs. The US-Iran conflict has certainly been a contributing factor, driving energy prices sharply higher and impeding the flow of other key commodities including fertilizers, helium and aluminum.

This is amplified by structural demand from the AI and energy-transition boom. Copper set a record high of $6.8073 in August and remains generally well bid amid growing demand from data centers and grids. Lingering supply constraints in both copper and silver play a role, and $6+ diesel will certainly keep upward pressure on mining costs.

Silver has formed an outside week, clouding the short-term picture somewhat. That range is likely to hold into the Fed decision on Wednesday. Today's low at $63.045 now provides an important barrier ahead of the midpoint of the Jun-Aug range at $62.941, the 19-Aug low at $62.574, and the 50-day MA at $62.541.

On the upside, Wednesday's high at $68.314 is the key to unlocking further tests above $70. An eventual breach of the late August high at $71.104 is needed to reestablish the Jul-Aug uptrend. I continue to believe the $80 level must be regained to revive confidence in the longer-term uptrend.  


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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