8/12/2024

Gold and silver trade higher as the market looks ahead to U.S. inflation data

OUTSIDE MARKET DEVELOPMENTS: U.S. Defense Secretary Lloyd Austin pledged "to take every possible step to defend Israel" in a call with Israeli Minister of Defense Yoav Gallant. Amid ongoing fears of an Iranian retaliatory strike on Israel, Austin has ordered the USS Georgia guided missile submarine to the region and the USS Abraham Lincoln carrier strike group to "accelerate its transit" to the Middle East.

Ukrainian President Zelensky confirmed over the weekend that Ukrainian troops are operating inside Russia. The incursion is entering its seventh day and Russian forces are still trying to contain the attack. The U.S. is sending an additional $125M worth of weapons to Ukraine, bringing total military aid to $55.6 bln since the beginning of the war.

The slowing Chinese economy is leading to labor unrest in the country. Nikkei Asia reports that labor strikes in China rose 3% in H1 to 719 incidents, led by the construction and manufacturing sectors. This number is probably low, but the fact that workers are willing to take such risks is a testament to how dire the situation is becoming.

Japanese markets were closed on Monday in observance of the Mountain Day holiday. Further near-term yen and stock market volatility are likely.

Today's U.S. economic calendar is light with just the release of July Treasury Budget on the agenda. The market is anticipating a deficit of $242 bln, versus -$66 bln in June and -$228 bln a year ago. The ever-rising level of U.S. debt is an ongoing concern for investors with significant implications for Treasuries and the dollar.

Focus this week is on U.S. inflation data. July PPI comes out tomorrow with median expectations of +0.2% m/m and a drop to 2.2% y/y. July CPI data will be released on Wednesday. The market is expecting +0.2% m/m with the annualized rate holding steady at 3.0%. 


GOLD
OVERNIGHT CHANGE THROUGH 6:00 AM CDT: +$12.49 (+0.51%)
5-Day Change: +$32.37 (+1.34%)
YTD Range: $1,986.16 - $2,481.63
52-Week Range: $1,812.39 - $2,481.63
Weighted Alpha: +29.64

Gold is trading higher for a third session with more than 78.6% of the early-August sell-off now retraced. The yellow metal is being buoyed by rate-cut expectations and ongoing geopolitical tensions as markets await U.S. inflation data this week.



Hotter-than-expected inflation readings could temper Fed easing expectations and ramp volatility yet again. If inflation comes in as expected or below expectations, the Fed will remain on track for up to a 50 bps rate cut at the September FOMC meeting. Fed funds futures currently put the probability of a 25 bps cut at 52.5% and a 50 bps cut at 47.5%.

The underlying trend for gold remains bullish but be prepared for additional short-term choppy trade. The unwinding of yen carry trades factored into the volatility seen early last week and further unwinding remains a risk.

The BoJ only pledged to stall further tightening "when financial markets are unstable," but the writing is on the wall. The BoJ is on a tightening path and the Fed is on the verge of easing. The BoJ will announce policy on 20-Sep just two days before the next policy statement from the FOMC.

Fresh all-time highs in gold may be difficult before the CPI release. However, the closes last week back above the 20-day moving average, and today's upside follow-through all bode well for the bull camp.

The series of lower highs and higher lows that have emerged since the record high was set at $2,481.33 on 17-Jul is indicative of a symmetrical triangle. This chart formation is typically a continuation pattern within the dominant trend, so an eventual upside breakout is favored.

The 02-Aug high at  $2,474.58 marks initial resistance. A breach of this level would clear the way for a retest of $2,481.33. Beyond that $2,500.00/$2,503.27 would attract.

Initial support is defined by an intraday chart point at $2,440.37/$2,440.00. More substantial support is found at the 2424.62/$2,417.62, where today's overseas low, and Friday's low converge with the 20-day SMA.


SILVER

OVERNIGHT CHANGE THROUGH 6:00 AM CDT: +$0.479 (+1.74%)
5-Day Change: +$0.673 (+2.47%)
YTD Range: $21.945 - $32.379
52-Week Range: $20.704 - $32.379
Weighted Alpha: +21.23

Silver is trading higher on the day, probing into the upper half of last week's range. While the white metal is garnering some support from a more bullish gold market, global growth risks continue to weigh.



On top of persistent worries about Chinese and U.S. growth, there are increasing concerns that waning economic confidence and weaker manufacturing orders could tip Germany back into a technical recession in Q3. Japan remains in a tenuous position as well. Worries about the four largest global economies do not bode well for industrial metals, which include silver.

Today's action may be short covering ahead of U.S. inflation data. A move back above $28 could trigger additional position squaring with potential at that point back to the 20-day moving average at $28.483.

However, I'd still like to see trades with a 29-handle to at least suggest the corrective low is in place. Such a move seems unlikely ahead of Wednesday's CPI report unless PPI comes in shockingly low.

Further out, the $30 level must be regained to return confidence to the longer-term uptrend and put the July high at $31.652 and the May high at $32.379 back in play. That seems unlikely without some significant change to global growth prospects, leaving the bears in control.

A more likely scenario is that a consolidative pattern emerges within the broad $32.379/$26.524 rage that developed over the past several months, particularly if haven buying can offset some of the demand-destruction-related selling. 

Initial support is noted at $27.703/681, which protects the overseas low at $27.255. The latter corresponds pretty closely with the halfway back point of the recent bounce.

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