Gold just hit an all-time high in Renminbi, the Chinese currency. I have been reporting on the Shanghai gold exchange on our social media for a little over a year, and I believe I was one of the first precious metals analysts to do so. Well, now we see why other gold markets are important. They give us critical information on the worldwide gold trade and a possible glimpse of what is coming to our markets.
Where China differs is the much higher delivery percentages of physical gold on their markets versus the US or UK markets. Here is a snippet from the most recent gold report on the Shanghai gold exchange.
It should be no surprise, then, that during unprecedented levels of economic uncertainty brewing around the world gold rises in the market that trades the physical the most.
Gold and Silver Analysis
Gold and silver markets are still consolidating as you will see in the charts below. This is the ‘boring’ part of the market where not much happens, and public interest in the metals tends to wane. This is; however, my favorite part of the market cycle because it means we are due for a breakout soon.
The first chart above shows the short-term gold market over the last year. Gold is clearly consolidating within the $1800 to $2100 long-term price range. It has been trading in about an $80 band since August on declining volume. Meaning that the market is light, and traders are just holding it in a range waiting for a signal. That signal, I believe, will be more news around the health of the banks and worldwide economy that will force gold to go higher.
Looking at the gold COT chart above, we see that the swap dealers (aka bullion banks) went net long on their contract positions, while most of the rest of the market went net short. There was some reduction in short positions by the producer/merchant group and an increase in long positions by the ‘other reportables’ which represent family offices and wealthy individuals. Basically, the banks are setting up the market for another mini-dip to take money off the table in futures and options bets.
But don’t let this repeated ‘washing’ of gold futures fool you. This is just the banks taking their slice of the market before the fireworks happen. Then we see where gold will really end up.
The silver chart shows a trading range of $17 to $27 in the last couple of years. In percentage terms, silver trades in a wider band and we call this volatility. Silver is more volatile, or has a higher beta, than gold. Physical silver investors are used to the action and often grumble about it. But they shouldn’t. Following the chart with properly placed silver buys will net silver investors much more money in the long run, especially when the next bull mania phase begins within the next year at the most.
Silver trade action is much different than gold, as the managed money went bearish while the other reportables and swap dealers did the opposite. The producer/merchants category dropped some short positions, likely in recognition of the fact that late Q3 and Q4 are traditionally the best periods for precious metals prices. They need less insurance against the fall in the price of silver during the next couple of months than at any other point in the year. So they take fewer short derivative positions.
We are about to get to the good part of the year on precious metals, so I hope you made your buys already. Not only that, but I think this time is more explosive due to worries about the banking system, war in Europe, and everyone predicting the next big recession to start soon.
The Macro View
The data isn’t particularly pleasant this week, but here are the major data points.
- The CPI surged from 3.2% last month to 3.7% this past month. That is a substantial gain in price inflation over one month.
- Producer prices also rose from 0.3% to 0.7%
- Retail sales rose from 0.5% to 0.6%, though when adjusted for CPI gains, are overall net negative
- Initial jobless claims rose from 216,000 to 220,000 this past month
- Business inventories remain flat-lined again this month
- Industrial production fell from 0.7% to 0.4%
- Two bright points are a rise in Empire State manufacturing from -19 to 1.9% positive and a slight rise in capacity utilization from 79.5% to 79.7%.
To summarize the above, inflation is back, raising prices across the board and eliminating any potential gains in retail sales. Inventories are flat, meaning businesses are not expanding right now due to worries about the future economy. Business owners do not want to take on inventory unless they have a verifiable purchase order for future production.
Industrial production is down, and this is before the recent UAW strike which will likely cause it to fall further if an agreement between auto workers and auto companies is not met. Manufacturing had a mini-rebound but it’s not nearly enough to offset recent losses, so we are still in net negative territory there for the year. Lastly, utilization of capacity is up slightly but not enough to make any real difference in production and thus GDP is likely to stagnate or fall when next reported.
Story of the Week
The two big stories of the week include all-time highs in gold prices in China, and more strikes coming to US manufacturing, this time in the auto sector.
The picture above shows that gold in Chinese currency has outperformed all asset classes outside of the US S&P stock index. That may be because outside of real estate, China’s largest asset class, precious metals are one of the few safe havens Chinese citizens have to protect their wealth. This signals to me that the worldwide recession is almost due as a billion people are not likely to be wrong about what is happening in their economy.
It is also a reflection of the ‘love trade’ which refers to the time of year when many Eastern cultures procure precious metals for various cultural ceremonies. This occurs in India and the Middle East as well and is likely to drive up gold demand on that side of the world.
As a result of the above, we can see that the premium to buy gold in China has risen to a new high over that of the US. My experience tells me the two prices will fight back towards equilibrium in the following few months, most likely happening in late December or in January of next year. That equilibrium does not mean that Chinese and US gold prices will equal out because typically gold has been priced higher in China for the last few years. But I think it means the gap closes a little bit from where it is here to a more normal range.
We also have the United Auto Workers (UAW) striking right now for the big 3 automakers. A leaked image on X (formerly Twitter) shows the nature of the UAW demands for their workers. Warning, you may faint after seeing it.
Among other things, the UAW wants to work 4 days but be paid for 5, to ALSO have a 46% pay raise, and to have their previous pension plan provisions restored. While a tall order, they have a lot of leverage against the auto companies in getting their demands. Net of all the wrangling between the two groups that is likely to occur over the next couple of months, I expect auto workers to come away with more pay and benefits than they have now.
While I do not begrudge them that, it also means cars just got more expensive in a market that can ill-afford more expensive cars. In turn, I expect overall auto demand to fall even faster than it is now, exacerbating the growth problem the auto companies are already having. In other words, expect the net effect on the US economy to be negative at the end of the day. And that, ladies and gentlemen, is not good news for any of us including US auto workers.
Executive Summary
Gold and silver prices continue to consolidate. While they are trading on the bottom of the trading ranges, I believe continued recessionary pressures will push them much higher. I will sound like a broken record on this to my readers, but that is just a continuation of a super trend in precious metals prices that I believe will make many PM investors happy. It just takes patience for the cycle to play out, which it always does.
The economic situation continues its long, slow decline into an expected worldwide recession. Inflation has kicked back up, putting us into another phase of this pernicious stagflation we have been mired in for some time. I don’t think we are at the hyperinflation stage just yet. That will happen after a big economic crash, which we haven’t had yet but which I think is still coming sooner rather than later.
As a result of this and the seasonal trade in gold, Chinese gold prices hit an all-time high while the gap to American gold prices widened at the same time. While the gap will shorten it will likely happen later in the year or early next year, assuming the recession does not happen first. If it does, then gold prices will surge in all world currencies at the same time.
More strikes, this time in the auto sector, are sure to cause rises in manufacturing costs and therefore price inflation. The middle class will continue to get squeezed and the consequences are long-term destruction in wealth creation that I think puts tremendous pressure on retirement portfolios. The younger generations are in for a rougher ride, but they can more than likely mitigate the risk by owning some precious metals. Time is running out on that opportunity, however.
Coin of the Week
As I write this, silver South African Krugerrands are on sale. I love the designs of these coins and they are very well recognized around the world. This is a great price on one ounce of silver that you probably should not pass up if you are at all interested in owning some of the metal.
