Calm before the storm

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by Alasdair Macleod, Schiff Gold:

The writing of this market report was at a time of great volatility, due to it coinciding with the speech of the Hezbollah leader, Hassan Nasrallah. The drift of it appears to be that Hezbollah will support Hamas. If so, it means an intensification of the Palestinian crisis Which would presumably drive gold and silver prices higher. This market report should be read in this context.

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Gold and silver continued to consolidate their bullish moves of last month, with gold trading at $1997 in lunchtime European trade, down $9 from last Friday’s close, and silver was $23.25, up 15 cents on the same timescale. Gold’s turnover on Comex has been moderating, though Open Interest (the thin line in the chart below) continued to recover.

In silver, Comex volumes reflected a lack of interest, and Open Interest is only 12,000 contracts above the lowest levels of recent years.

Having briefly challenged the $2000 level, gold is now consolidating in the upper $1900s. Traders will be assessing the importance of the $2000 barrier. How much work will the price have to do to go through it convincingly, or does it mark the top for the immediate future? They will be studying their charts, which look encouraging for the bulls, as our next chart demonstrates.

While these indicators are not infallible, to have the 55-day moving average turning up above the 12-month MA underneath the price is a powerfully bullish chart pattern. Anecdotally, sentiment supports this bullish reading, with the investing selling ETFs. According to the World Gold Council, “September saw continued net outflows from global gold ETFs, extending their losing streak to four months”. And from WGC figures we see that in 2023 to September, ex-Asia net sales of ETFs were 203 tonnes

Clearly, the global public got bored with gold, seeing it decline while bond yields rise. Therefore, it was hardly surprising that the price exploded upwards when the Israel-Hamas situation suddenly escalated. Indeed, that looks far from being resolved and it is a fair bet that the troubles will spread, threatening an escalation of hostilities from Hezbollah — there are already some minor skirmishes taking place.

Despite these prospects, this week has seen a lull in developments, other than predictable attacks on Gaza by Israel. That could change later today (after this report is released) because Hassan Nasrallah, cleric and leader of the Iran-backed, militant group Hezbollah will break his silence on the war between Israel and Hamas. This is bound to be critical, because as Iran’s proxy, Nasrallah will undoubtedly be defining Iran’s position. Will it be actually war, or the threat of war? In either case, it looks like leading to an escalation of tensions.

It is hard to see why Hezbollah/Iran will butt out and merely reiterate demands for peace. Meanwhile, everything is on hold. Bond yields have declined as speculators lock in profits, as the chart of the US 10-year Treasury Note shows.

Unfortunately for markets, this chart strongly suggests that the decline in yield is a normal reaction in a powerful underlying trend, implying that US bond yields are heading significantly higher. This is entirely consistent with contracting bank credit, soaring government budget deficits, and a deteriorating geopolitical outlook. These are also the conditions which drive gold prices higher.

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