6/26/2024

Gold and silver continue to slide on strong dollar, hawkish Fed, and inflation concerns

OUTSIDE MARKET DEVELOPMENTS: The dollar remains generally well bid, buoyed by interest rate differentials. The dollar index has reached 8-week highs and appears poised to trade with a 106 handle, which it hasn't seen since 01-May.

U.S. Dollar Index Daily Chart

Hawkish FedSpeak from Fed Governor Bowman yesterday suggested there may not be a Fed rate cut at all this year. In fact, Bowman indicated she was willing to raise rates if progress on inflation stalls or reverses. 

We'll get to see the Fed's favored measure of inflation on Friday. Expectations are that the chain price index for May will be unchanged, with perhaps a 0.1% increase ex-food & energy.

Fed Governor Cook said it would be appropriate to cut rates "at some point." It doesn't get much more non-committal with regard to timing than that. Certainly, it was not enough to offset Bowman's comments. Neither was the decline in Jun consumer confidence nor a weak Richmond Fed Index.

The Japanese yen has fallen to its lowest level since 1986 against the dollar, putting the market on alert for more BoJ supportive intervention. While the BoJ has recently hiked rates, they remain near zero making carry trades extremely enticing. Borrow at near-zero rates in Japan and invest in U.S. Treasuries that are yielding 4.25% to 5.49%. Seems like a no-brainer.

Japan narrowly avoided a recession last year, eking out 0.4% growth in Q4-23. However, the economy contracted at a 1.8% annualized rate in the first quarter of this year. While Japan returned to growth in Q2 (JCER forecasts +2.19%), the IMF projects 2024 GDP to be just +0.9%.

Japan's aging population and low birth rate are weighing on productivity and economic growth. This is a macro trend that Japan will have to contend with for some time.

The yuan also continues to weaken as the Chinese 10-year bond yield fell to a 22-year low. The PBoC lowered the reference rate for the yuan to 7.1248. It was the sixth consecutive cut.

ECB Governing Council member Rehn said that market data implies two more rate cuts this year. "In my view, they are reasonable expectations," said Rehn. The ECB's Panetta stressed that policy must remain data-dependent, noting that "political and geopolitical risks remain high."

Aside from a developing overbought condition, there seems to be little standing in the way of the greenback. The high for the year in the dollar index at 106.52 is within striking distance. A breach of that level would put the COVID-era high at 114.78 (Sep-2022) in play.

GOLD

OVERNIGHT CHANGE THROUGH 6:00 AM CDT: -$11.26 (-0.49%)
5-Day Change: -$15.15 (-0.65%)
YTD Range: $1,986.16 - $2,449.34
52-Week Range: $1,812.39 - $2,449.34
Weighted Alpha: +21.50

Gold slid to fresh 2-week lows in overseas trading and losses have extended early in the U.S. session. The market is still reeling somewhat from Bowman's comments yesterday, and the yellow metal's historic inverse relationship with the dollar may be re-exerting itself.



Gold had shown remarkable resilience in the face of higher interest rates and a strong dollar throughout the Fed's tightening cycle. Gains since Feb were largely the result of expectations that the Fed was on the verge of pivoting toward looser policy.

Gold set a record high on 12-Apr at $2,427.00, just days before the dollar index reached its high for the year (thus far) of 106.62. Gold went on to set another record on 20-May at $2,449.34. Even now, gold is just 6% off that all-time high.

Nonetheless, the short-term outlook has dimmed this week. The breach of support at $2,296.92 (13-Jun low) leaves the more important $2,287.64 (07-Jun) and $2,281.97 (01-May) lows vulnerable to challenges. A case can be made for a head-and-shoulders top on the daily chart with a line drawn between those lows defining a slightly upsloping neckline.

It seems unlikely that the bears will be able to take out this formidable chart level ahead of important inflation data on Friday. However, if inflation comes in hotter-than-expected further losses would be likely. Below $2,281.97 there's not much in the way of support until $2,206.03 based on a Fibonacci retracement.

Inflation at or below expectations would bode well for a rebound into the range. A short-term move above $2,334.36/$2,326.64 would ease pressure on the downside.


SILVER

OVERNIGHT CHANGE THROUGH 6:00 AM CDT: -$0.044 (-0.15%)
5-Day Change: -$1.001 (-3.36%)
YTD Range: $21.945 - $32.379
52-Week Range: $20.704 - $32.379
Weighted Alpha: +29.22

Silver is leading the metals lower in U.S. trading. The white metal has fallen to a fresh 6-week low at $28.618.



The next level of support I'm watching is $28.467 (61.8% retracement of the leg up from $26.049 to $32.379). The lower limits of a bearish channel will come in just below $28 by the time Friday's important inflation data are released.

On the optimistic side, looking at the daily and weekly charts, that bear channel has the earmarks of a bull flag. A word of caution though, the lower limits may need to survive another test and there needs to be considerable upside retracement to build confidence in this chart pattern.

The halfway back point of the decline from last week's high at $30.824 comes in at $29.05. I'd like to see this level regained to shift focus to Monday's high at $29.714 and the upper reaches of the bear channel/bull flag which are just above $30 through the end of the week.

The Royal Canadian Mint published a piece this week highlighting silver's role in the green economy. The article features data previously mentioned in this newsletter that shows strong demand for silver for use in applications such as solar panels, EVs, hydrogen fuels, 5G networks, and water purification. This demand exceeds the available supply, providing a significant long-term tailwind for silver.


Peter A. Grant
Vice President, Senior Metals Strategist
Zaner Metals LLC
Tornado Precious Metals Solutions by Zaner
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