Gold eases from record high, while silver consolidates within Thursday's range

OUTSIDE MARKET DEVELOPMENTS: Global trade worries have increased after President Trump said he would impose tariffs on Canada and Mexico on Saturday. The President cited the trade deficits with those countries, along with the flow of illegal immigrants and drugs across the borders as the reasons for the tariffs.

"If the president does choose to implement any tariffs against Canada, we’re ready with a response – a purposeful, forceful but reasonable, immediate response," responded Canadian PM Justin Trudeau.

"We will wait, as I have always said, with a cool head, when taking decisions. We are prepared and we maintain this dialogue," said Mexican President Claudia Sheinbaum.

As the world's largest consumer market, the U.S. carries trade deficits with nearly all of its trading partners. If a deficit makes you a potential target for U.S. tariffs maybe everyone is rightfully worried.

In making imported goods less attractive to U.S. consumers by raising prices through tariffs, perhaps domestic products become more appealing and provide a boost to GDP. However, it's a very complex system and there will be unintended consequences. Some level of heightened inflation is likely one of them.

That may make it difficult for Trump to honor his pledge to reduce inflation. Maybe reduced energy and regulatory costs will offset price increases elsewhere, but that's a big maybe.

Increased price risks will also make it difficult for the Fed to continue on its easing path, which is also one of Trump's desires. Further rate cuts could stoke inflation even more. The Fed may actually have to consider tightening to check a rise in prices.

Bottom line, Trump's economic team has its work cut out for it. This has raised uncertainty and sapped risk appetite.

The Fed's favored gauge of inflation rose in December in line with expectations. The annualized rate of PCE inflation increased to 2.6% from 2.4% in November. Core PCE inflation was steady at 2.8%.

Warmer inflation caused rate cut expectations through July to moderate slightly. How the new administration's fiscal policies play out is of interest to Fed Governor Bowen (centrist/hawk). "It will be very important to have a better sense of the actual policies and how they will be implemented, in addition to greater confidence about how the economy will respond," she said.

Q4 Civilian ECI rose in line with expectations at a 0.9% pace, versus +0.8% in Q3. Employment costs continue to gradually, if somewhat erratically, moderate from pandemic-era highs.

Personal Income rose 0.4% in December, in line with expectations, versus +0.3% in November.

PCE rose 0.7% in December, above expectations of +0.5%, versus a positive revised +0.6% in November (was +0.4%). The jump in consumption was supported by the rise in wages, but it was also supported by a decline in the savings rate.

PCE Chain Price Index rose 0.3% in line with the consensus, versus +0.1% in November; +2.6% y/y, up from 2.4% in November. Core chain prices rose 0.2% which was also in line with expectations, versus +0.1% in November; +2.8% y/y, unchanged from November.

Chicago Fed PMI rebounded to 39.5 in January, above expectations of 39.0, versus a seven-month low of 36.9 in December. It was the first increase since September as Boeing continues to weigh on the index, even post-strike.

Ag Prices come out this afternoon. 


GOLD

OVERNIGHT CHANGE THROUGH 6:00 AM CST: +$6.99 (+0.25%)
5-Day Change: +$32.30 (+1.17%)
YTD Range: $2,607.16 - $2,815.25
52-Week Range: $1,986.16 - $2,815.25
Weighted Alpha: +35.60

Gold extended to new all-time highs on Friday above $2,800. The yellow metal is poised for a fifth straight higher weekly close as global trade uncertainties stoke haven interest.

 

The ongoing easing bias of major central banks continues to offer support as well. This is true even though the Fed appears to be on hold for the time being and the BoJ is cautiously raising rates from sub-zero levels.

Market dislocation associated with the transfer of physical gold from London to Comex to front-run tariff risks is also providing a tailwind. Diminished liquidity in London, the global center of the gold trade, is buoying the price. “People can’t get their hands on gold because so much has been shipped to New York, and the rest is stuck in the queue,” said one expert in an FT article this week.

In addition, 64.2 tonnes of gold was exported from Switzerland to the U.S. in December. That's the highest monthly gold flow since March 2022, in the wake of Russia's invasion of Ukraine.

While it's not abundantly clear to me why gold would be targeted for tariffs, Trump's threats have been rather sweeping. It's therefore understandable that those involved in the gold trade would take steps to limit their exposure.

If a trade deficit with the U.S. makes you a general target for tariffs, it's worth noting that we frequently have a trade surplus with the UK. That's not the case with the Swiss.

The arbitrage opportunity presented by high futures premiums on Comex strikes me as a more logical catalyst. Commodities flowing toward the highest available price makes sense to me. That contango bodes well for the newly reestablished uptrend.

However, the current situation is creating issues elsewhere in the market. Lease rates have soared and there's panic in the EFP market. "You currently have to pay to be short gold on the OTC spot market (more typically shorts get paid a yield). This has put a strain on bullion dealers and refiners," said Adam Packard, Vice President of Operations at Zaner Metals. He expects the situation to continue for a while longer.

Gold has backed off from the intraday high at $2,815.25 on profit-taking ahead of the weekend, but short-term setbacks are likely to be viewed as buying opportunities. Sights remain on the the $2,857.21 Fibonacci level (127.2% retracement of the decline from $2,789.68 to $2,541.42), as well as a measuring objective at  $2,936.00 and of course $3,000 as the next "big round number."

Today's low from Europe at $2,791.90 marks first support and protects the previous highs at $2,789.68/$2,784.96. Monday's low at $2,732.23 should correspond closely with the 20-day moving average next week and is a key short-term level to watch.

Silver has been confined to Thursday's range, despite the fresh record highs in gold as the latest uptick in global trade tensions gives the bull camp pause. Nonetheless, the white metal is holding above $31 and is on track to notch a second consecutive higher weekly close.



I have maintained that a rise above $31 would set a more neutral tone, mitigating downside risks somewhat. However, $32 must be cleared to set a more favorable technical tone. I'm still waiting.

A close above all the major moving averages seems likely today. I am also watching the 20-week moving average at $31.128. A close above would offer some additional encouragement to the bulls.

The 100-day moving average at $31.085 bolsters the significance of the $31 level as support. A breach of this level next week would call for further consolidation with a bearish tilt.


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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