9/23/2024

Gold sets new record highs as silver fails to sustain gains above $31

OUTSIDE MARKET DEVELOPMENTS: Israel's war intensified on its northern border after escalated rocket and missile attacks by Hezbollah prompted more Israeli airstrikes inside Lebanon. “It is clearly a very dangerous situation and clearly has a potential of escalating dramatically,” said Israeli President Isaac Herzog.

Israel continues to prosecute the war against both Hamas in the south and Hezbollah in the north, despite international pressure for a ceasefire. "We're going to do everything we can to keep a wider war from breaking out," asserted President Biden. The U.S. is reportedly sending additional troops to the region.

Eurozone HCOB flash manufacturing PMI tumbled to a 9-month low of 44.8 in September, below expectations of 45.7, versus 45.8 in August. Services PMI fell to a 7-month low of 50.5 on expectations of 52.3, from 52.9 in August.

Despite mounting growth risks in Europe, ECB Governing Council member Martins Kazaks believes service price inflation is the bigger worry. “In my opinion, the risk of service price inflation is still more significant at the moment," said Kazaks. Such concerns may push the next ECB rate cut into December.

After the BoJ held steady on rates last week, BoJ Governor Ueda indicated that the central bank is in no hurry to hike again. While Ueda sees the Japanese economy as "moving in line with our forecasts," he believes the outlook for the U.S. economy has become more uncertain.

The yen weakened in response, providing some underpinning for the dollar. However, the dollar index remains generally weak within striking distance of last year's low at 99.58 after the Fed launched its easing campaign last week with an oversized 50 bps cut.

It appears that Congress has reached a short-term funding compromise that will avert a government shutdown until after the election. The outcome of the November elections will certainly pose challenges for passing a budget before the new deadline of 20-Dec.

Chicago Fed President Austin Goolsbee (centrist-hawk/nonvoter) believes rates need to come down significantly over the next year. The market has priced in an additional 50 bps in cuts for the remainder of this year, with the Fed's dot plots projecting a Fed funds rate of 2.9% in H1'26.

The Chicago Fed National Activity Index rebounded to 0.12 in August from a negative revised -0.42 in July. The 3-month moving average remained in negative territory for the 23rd month.

U.S. flash manufacturing PMI fell 0.9 points to 47.0 in September. The preliminary read on services PMI came in at 55.4, down from 55.7 in August. 

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence worries that "intensifying political uncertainty" poses a substantial headwind to the economy. Williamson also notes a "reacceleration of inflation" that could be a hawkish influence on Fed interest rate decisions moving forward.

GOLD

OVERNIGHT CHANGE THROUGH 6:00 AM CDT: -$0.29 (-0.01%)
5-Day Change: +$47.93 (+1.86%)
YTD Range: $1,986.16 - $2,633.96
52-Week Range: $1,812.39 - $2,633.96
Weighted Alpha: +42.45

Gold continues to set record highs amid heightened geopolitical tensions, last week's launch of the Fed's easing cycle, and a generally soft dollar. While momentum has waned somewhat, the yellow metal has traded as high as $2,633.96 in the U.S. session.



The next upside target is $2,674.84 based on a Fibonacci projection. Beyond that, the next psychological barrier at $2,700 attracts. The Fed dots project another 185 bps in rate cuts in the cycle, which poses a significant headwind for the dollar and makes $3,000 gold look increasingly appealing.

Short-term setbacks are likely to be viewed as buying opportunities. Initial support is marked by the overseas low at $2,614.86. Secondary supports are at $2,600.00/$2,597.42 and $2,585.74/$2,584.84.

Global ETFs saw 3 tonnes in inflows last week. Solid interest from North American investors – to the tune of 8.1 tonnes – more than offset European and Asian outflows. Net inflows have been recorded in five of the last six weeks.

 

The COT report for last week showed that the speculative net long position surged by 27.6k to 310.1k contracts. That's the biggest long position since 03-Jun 2020.

Silver is back on the defensive after setting a 10-week high at $31.413 on Friday. Today's global PMI readings indicate ongoing weakness in manufacturing that could adversely impact demand for the white metal.



However, more record highs in gold are seen as a supporting factor for silver as investors seek a less expensive alternative to the classic safe haven. A short-term breach of the July high at $31.652 is needed to put the high for the year at $32.379 (21-May) in play.

The net speculative long position in silver futures rose 13.6k to 58.3k contracts on last week's rally according to the CME's COT data. It's the biggest net-long position in nine weeks. 

CFTC Silver speculative net position

The German auto industry is demanding more subsidies to stimulate flagging electric vehicle sales. The auto industry currently uses about 80M ounces of silver annually. However, EVs require nearly 75% more silver than conventional ICE vehicles.

Broader adoption of EVs would be good for the silver market. As of last year, only 3.2% of vehicles on the road were electric. That suggests there's plenty of room for growth, but consumers still prefer their gas-fueled cars.

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