I am going to talk a bit today about the positioning of the gold and silver paper markets. These markets, known as the COMEX or derivative futures markets, are where the spot price ultimately comes from. In other words, your local coin dealer is not setting his/her own spot prices on the metals. They follow the futures markets because that is supposedly where the market price is determined.
I will note that while that this price has little to do with current demand and supply factors in the physical market, which confuses many people. Truth be told, it is confusing to me as well because I would expect actual metals trader, producers, and merchants that use them to determine prices. But this is the bizarro world we find ourselves in, ladies and gentleman.
Gold and Silver Analysis
Gold is trending down, almost falling below the moving average of the last 200 days. See chart below for the indicator.
While not a wonderful feeling, we must remember this is the weaker season traditionally for the precious metals. Summer generally has larger fades than what we have seen. That being said, gold needs to stay above its 200-day moving average for us to call it a positive market. Below that line, we begin to consider whether gold is starting a legitimate downtrend. I do not think it will this year given economic fundamentals, but we shall see.
Silver is in a different position. Its price is much more volatile than gold mainly because it is an industrial metal first and foremost. Though silver has been money for 6000 years of recording history, the last 50 or so of those years have seen silver priced as a commodity used in thousands of products. Silver has fallen below the 200-day moving price average, meaning it is decidedly bearish now.
However, I believe that is a short-term indication of weakness in silver demand due to some deflation in the world economy. If gold price accelerates this fall on weak economic news and an impending recession, as I expect it will, monetary demand for silver will return and buoy the price back to previous levels.
What gives me some hope for both metals are the positions being taken by the bullion banks with respect to their futures positions. In both gold and silver, the sharp money has been dumping their short contracts in both gold and silver, and moving them over to them managed money. You may recall from previous articles that the managed money represents the financial houses and similar entities in the US. In other words, your broker, many hedge funds, and likewise enterprises. Those entities are most likely to lose money in the fall if the precious metals prices begin to rise.
The bullion banks are positioning longer in both metals heading into the fall. Likely, the recent pullbacks in price were to cover short positions, known as ‘short covering’, while they reduced those positions and began to buy more long futures contracts. In layman’s terms, the big banks are expecting the prices to go up soon, not down, but they needed lower metals prices in the meantime to cover their change of position without losing money. That is how this market works, folks. So do not worry too much about the late summer mini-swoon in metals as I believe it will not last too long.
The Macro View
The economy is still moving sideways right now in the major indicators on a weekly basis. However, the longer trend is down. I believe we are in the eye of the hurricane before the next big crash down happens, likely starting this fall. Here are the main data points from last week.
Consumer credit usage is spiking again, this time at over $17 billion. Consumers have added a lot of credit in the past 18 months, and after a very brief slowdown, are back at it again. This is not a good sign as it means consumers have less disposable income and are living off borrowed time. Eventually they will max out the credit cards and be forced to make hard decisions on which lender to pay back. This is when more bank defaults are likely to begin again.
There are signs the economy is deflating, headlined by a fall in US trade imbalance by $2.7 billion from last month. Typically, I would say it is a good thing that we are starting to reduce our purchases of foreign goods because it would indicate a manufacturing boom.
But sadly, that is not the case as the manufacturing indexes have been crashing in recent months and US wholesale inventories of goods and supplies are also down. It simply means we are heading for a contracting economy at just the worst time. After all, there is a lot of debt at all levels to pay back and we need higher production and increasing incomes to do it. That is not on the horizon.
On the employment front, initial jobless claims spiked to 248,000. While the financial media will tell you this is not an issue because employment benefits applications have just fallen, I will point out this is simply because those benefits have an expiration and people can no longer get them. You cannot live on the dole in this country forever.
The overall trend is that gross employment levels never recovered from the 2008-09 Great Recession and there are increasing amounts of people that have nowhere to turn for help. The government cannot help them and there are not enough jobs to allow people to pay their loans back. Hence, the surge in consumer credit we have seen for well over a year now.
Story of the Week
The story of the week is the faltering Chinese economy. This is important for two reasons. First, it highlights the fact that most major economies are in trouble now. Second, it underscores the importance of US demand to China and how our own deflating economy is causing problems on the other side of the globe.
According to a story by two Bloomberg writers, China is deflating. Use of credit is falling and analysts are calling for the government to ease monetary conditions to increase new loans and spending.
The chart above shows a precipitous fall in Chinese financings. The article notes that “The nation’s banks extended the smallest amount of monthly loans since 2009, and aggregate financing was less than half the level forecast by economists.”
Both producer and consumer price indexes are falling for the first time since 2020, and we know what happened that year. Whole economies were shut down from the pandemic. Chinese exports are also falling as shown in the following graphic.
The Bloomberg writers go on to note the following trends.
“The credit demand is very subdued,” said Lu Ting, chief China economist at Nomura Holdings Inc. “The key remains to send clear policy signals regarding the private sector, foreign companies and the real estate industry, so that people become willing to borrow money and invest, including in housing.”
Meanwhile, Country Garden Holdings Co.’s troubles reflect the impact of a delay in rolling out forceful housing market policies: once the country’s top builder, the developer has become a penny stock as it was said to be considering a move to extend some of its notes that will fall due soon. This is adding to the overall gloom surrounding Chinese assets.”
It is NOT looking fantastic across the Pacific, folks.
Executive Summary
Gold and silver finally had a rough week on the markets. It happens. Most sports teams do not go all season without a rough stretch of losses. The economy works the same way. However, most factors point to substantively higher prices this fall as the world economy lurches toward recession.
Consumers are taking on more credit. Despite the government ignoring those without a job for more than a year, the pressures out of work folk are having shown up in the credit usage numbers. You cannot hide the truth there. And the truth says that we are approaching a high-noon showdown with the banks and credit defaults coming soon.
The Chinese market is showing serious signs of deflation. That is not a good thing in globally-connected world economy. It likely means more defaults in Chinese companies puts increasing pressure on banks around the world. We are not in a zero-sum world anymore. Every economy is connected and we need them all to do relatively well. Unfortunately, that is not what is happening as we speak.
Coin of the Week
JMBullion has Asahi silver rounds on sale at the time of this writing. Silver on sale is always a good thing, so this is one of the easiest recommendations I can make. Get them while you can, because I have a sneaking suspicion the whole world is soon going to jump on the precious metals’ bandwagon.
