8/28/2024

Gold and silver correct, weighed by a firmer dollar

OUTSIDE MARKET DEVELOPMENTS: Risk appetite has waned somewhat as markets seek more data to clarify central bank policy intentions. While a Fed rate cut in September is now a foregone conclusion in the eyes of many, the debate on how big that first cut will be is underway.

The Fed's favored measure of inflation comes out on Friday. The PCE Chain Price Index is expected to show a scant 0.1% rise, which would reinforce Fed Chairman Powell's contention that "upside risks to inflation have diminished."

The dollar index has rebounded from yesterday's 13-month low. This action was likely associated with profit-taking ahead of formidable support at 99.58 (last year's low) and the upcoming long holiday weekend.

However, with the market still pricing in 100 bps of cuts by the end of the year, further losses in the dollar are considered likely. Fed funds futures are projecting more than 200 bps of easing through the end of next year. 

While the Fed is about to embark on an easing path, the BoJ will likely tighten again before year-end. Jaideep Tiwari, global head of FX strategy at Citi Wealth, told CNBC earlier this week that the dollar could reach the mid-130s against the yen next year. The USD-JPY rate is currently trading at 144.50.

Tiwari believes most of the speculative money has already been shaken out of the yen carry trade. However, impending changes in interest rate differentials could lead to further market volatility like we experienced early in the month.

I've written this year about the developing demographic issue facing China and the possible implications for the global economy. Surging school closures in China highlight how dire the situation has become.

According to NikkeiAsia, the number of children enrolled in preschool fell by 5 million last year to 40.92 million, the lowest figure in a decade. More than 20,000 schools have been shuttered in the past two years due to declining enrollment.

China's population fell by more than two million in 2023 to 1.409 bln. UN projections see China's population nearly halving by 2100. 

As the population ages in the years ahead, the workforce will continue to shrink. Meanwhile, the retirement-aged population is expected to swell to more than 400 million – bigger than the population of the entire U.S. – over the next 20 years.

Fewer employees and employers will be supporting all those retirees, straining the pension system and stoking a fiscal crisis. "The fiscal strain as a result of ageing is immediate and concerning," warned Economist Intelligence.

China is not alone. Demographic challenges are also manifesting in Japan, South Korea, and parts of Europe. Birth rates in Canada and the U.S. are also well below the replacement rate at 1.43 and 1.66 respectively.

According to the Institute for Health Metrics and Evaluations, "over half of all countries and territories (110 of 204) [are] below the population replacement level of 2.1 births per female as of 2021."

It's a disturbing global trend with far-reaching economic implications, perhaps especially for countries saddled with soaring debt burdens. Are the open border policies that have emerged in recent years in much of the West related to the burgeoning demographic issues?


GOLD

OVERNIGHT CHANGE THROUGH 6:00 AM CDT: -$18.75 (-0.74%)
5-Day Change: -$13.03 (-0.52%)
YTD Range: $1,986.16 - $2,529.57
52-Week Range: $1,812.39 - $2,529.57
Weighted Alpha: +30.42

Gold eked out a new high for the week in early-Asian trading at $2,527.97, but could not take out last week's record high at $2,529.57. The yellow metal retreated in subsequent trading weighed by a stronger dollar and perhaps some position squaring ahead of the long holiday weekend.



From a technical perspective, the outside day and a likely lower close are at least short-term troubling. Tests below $2500 leave Friday's low at $2,484.53 vulnerable to a test. More substantial support is noted at $2,474.31 (22-Aug low) and corresponds closely with the rising 20-day moving average at $2,467.42 today.

A close above $2,506.22 would somewhat diminish the significance of the bearish reversal day. However, at this point, new record highs are probably off the table at least until July PCE data come out on Friday.

With gains in the dollar seen as corrective, losses in gold are seem as corrective as well. Further challenges of the upside are expected, with $2,539.77 and  $2,597.15/$2,600.00 still seen as valid objectives.

SILVER

OVERNIGHT CHANGE THROUGH 6:00 AM CDT: -$0.477 (-1.59%)
5-Day Change: -$0.328 (-1.11%)
YTD Range: $21.945 - $32.379
52-Week Range: $20.704 - $32.379
Weighted Alpha: +23.50

Silver tumbled to new lows for the week after repeatedly failing to sustain tests above $30. The white metal is off more than 3% from Monday's 6-week high at $30.164.



Silver is challenging the 50- and 100-day moving averages at $29.217/141, which protect more important chart supports at $28.950 (23-Aug low), 28.830 (22-Aug low), and 28.781 (19-Aug low). If the latter gives way, focus will shift to the 20-day moving average at $28.498.

A rise above the halfway back point of today's range at $29.611 would ease short-term pressure on the downside. However, the market seems to be waiting for some new catalyst to either push it toward the highs for the year above $32 or send it back into the range below $28.

A weak inflation reading in the PCE data on Friday would increase bets for a 50 bps Fed rate cut in September, putting the dollar back on the defensive and providing a renewed lift for the precious metals.  A more neutral inflation print would have the market looking further down the road to the following Friday and August jobs data. 

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