Gold, Silver, and Palladium Commentary
July 15, 2020
The ratio of the 1-month Gold contract to the 1-month Silver contract (Figure 1) continued the downward trending, falling another 1% this last week. This fall was driven by silver’s aggressive upward move. With the front month silver and gold contracts closing yesterday at $19.45 and $1,810.60, respectively, the gold/silver ratio is now 93.09, or 20% higher than the 5-year average. Considering the ratio was 62% higher than the five-year average back March it has moved significantly lower and is now at a value like that seen in 2019. August Gold (Figure 2) continued moving up, closed yesterday at $1,813.40 with closes remaining above 1800 for the last week. September silver (Figure 3) moved up to $19.61 from $19.16 last week. Silver broke above $19, the top of its trading range for the last year. Total open interest has continued to increase since its recent low on 7/2/2020 while the latest COT report shows net non-commercial positions remain at levels seen since the end of May, but this data is lagging by one week. Increasing open positions along with increasing price may indicate the upward move in silver is not yet over. Recent news regarding additional shutdowns due to COVID could have short-term impact on expectations.
On 7/14/2020 the August COMEX gold contract (Figure 2) ended the day at $1,813.4, up from $1,809.9 at the close on 7/7/2020. Open interest continues to rise slowly along with the price. Should the EU reach agreement on a projected 750 billion Euro fund later this week, this could weaken the dollar resulting in a gain for gold. However, should equities turn south, this could drive demand for liquidity causing some downward pressure on gold. We expect gold to trade in the range between $1,768 and $1,837 for the next week.
While palladium ended above $2000 on 7/13 of this week, it remains within a trading range seen since May 2020. It should be noted that total open interest continues to build since the lows in late June and the COT report shows net non-commercial positions continue to increase as well. As mentioned last week we will continue to watch this trend to see if there may be early signs of a directional move. Without a clear signal of increasing open interest or news on increased production demand, we expect palladium to continue to trade in a similar pattern for the near future.
Much has been published of late regarding the potential for increased gold prices, due to inflation caused, by the FED response to COVID. Other reports have stated fewer of these dollars are reaching the market, which is the opposite of what is needed to be inflationary. What is interesting is the extreme correlation between COMEX gold and the inverse of the 10-year treasury indexed to inflation. Since late 2018, the price of gold has tracked very closely to that of the real return (shown here as zero – real return).
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The Fundamental Analytics Team
The information provided here is for general informational purposes only and should not be considered individualized investment advice. All expressions of opinion are subject to change without notice in reaction to shifting market conditions.