Gold and silver continued their consolidation phase this week, but the undertone remained firm.
Technically, it is fair to assume that both metals are no longer overbought, though aside from Comex releases, this is difficult to prove statistically. But a glance at our introductory chart tells all, with gold and silver consolidating the previous rise by simply moving sideways.
The gold price rose $11 from last Friday’s close to trade at $1347 early in European trade this morning, while silver declined 14 cents over the same period to $19.57. Volumes on Comex have dropped off noticeably this month, consistent with the holiday season. However, these are the conditions which favour the bullion banks, allowing them to take over pricing control. When the speculators are on holiday, prices can be marked down unchallenged, allowing the bullion banks to close down their shorts profitably. But even though open interest remains high by historic standards, this is not happening.
As our opening chart suggests, there are solid buyers on the dips who are not behaving like flighty hedge fund managers. Conventional investors are gradually coming round to the idea that gold should be included in their portfolios. This week, Lord Rothschild, chairman of Rothschild Investment Trust, revealed that the fund had established an exposure to gold of 8% of the fund by the end of June.
He is not alone, as the growing stockpile of gold held in ETFs testifies. The motivation is growing uncertainty about the long-run effects of current monetary policies, and the fact that they are not working. Pressure is now mounting for governments to stimulate their economies by fiscal means, but this is a last throw of the dice that only serves to misallocate economic resources.
The bullion banks themselves seem to have had a change of heart. Some analysts who got it horribly wrong appear to be keeping quiet in embarrassment, while the previously less outspoken ones are prepared to talk gold moderately higher. Their trading desks are not immune to these influences, and we see this in their trading tactics, which can be summed up as “don’t rock the boat, and make our position worse”.
There is a darkening cloud in this bullish sky, which is the rise and rise in US dollar LIBOR. This is the closest thing to a free market interest rate, and it has been rising along with US bank lending. I write about this at greater length here. It is possible, though I deem it unlikely, that the Fed will pursue a more aggressive interest rate policy to curb these early signs of monetary inflation to ensure they do not fuel above-target price inflation. As I point out, in the FOMC minutes for end-July released this week, the topic of monetary inflation never arose.
That said, the rather confused opinions reflected in the minutes shows there is disagreement among committee members over interest rate policy, and while the markets do not foresee a rise in the Fed Funds Rate in the immediate future, bullion markets seem better prepared for a rise before the year end.
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