Gold, Silver, and Palladium Commentary
September 9, 2020

The front month contracts of gold and silver are down from last week -1.79% and -5.69%, respectively. Gold continues to trade in a pennant type pattern and is currently near the top of the pennant.  The ratio of the 1-month Gold contract to the 1-month Silver contract (Figure 1) rose 3.98% since last week, moving sideways since early August.   With the front month gold and silver contracts closing yesterday at $1933.00 and $26.86, respectively, the gold/silver ratio is now 71.955, 10.6% higher than the corresponding 15-year average.   December gold (Figure 2) closed yesterday at $1943.20, down 1.80% from the close on September 1.  December silver (Figure 3) closed at $26.99, down 5.69% since last week, settling into a sideways movement.

From an open interest perspective, gold’s total open interest increased 0.6% since last week and is essentially flat since early August, and it is still well above the 5-year average.   The latest CFTC data for gold for non-commercial net position of funds showed an increase to levels seen in the August 11 report.  This was driven by an increase of non-commercial long positions while non-commercial short positions were essentially unchanged.   Silver total open interest continues to fall from the recent peak on August 6 and is down 23.5% since that date.  However, the latest CFTC data show the silver non-commercial net positions of funds are up 2.7% at the same time.  Both non-commercial longs and shorts are up for the week.    It is interesting to note the net non-commercial position of funds and total open interest have been trending in opposite directions since mid-August.  The reduction in total open interest seems to be driven by a reduction in net commercial positions possibly indicating commercials have a lower need for hedging due to silver on-hand due to lower demand.

Now for Palladium.  Palladium closed at $2305.80 yesterday, down 0.23% from the close last week Tuesday and remains range bound between $2140 and $2365.   While total open interest is up 1% since last week, it is down 7% since mid-August and a massive 64% since January 2020.   The latest CFTC report shows net non-commercial fund positions increased 8% since the previous report.   The palladium/silver ratio jumped this last week with the reduction in the price of silver.   It should be noted the price of rhodium continued its climb and is now above $13,000.  The last time rhodium hit these levels, palladium prices soared to $2700 as catalytic manufactures began to replace rhodium with more palladium in an attempt to reduce the overall cost of materials.

The final thoughts I leave with you are regarding inflation, inflation expectations and the future price of gold.   It is often stated that inflation is affected by expectations of inflation.  From a very simplistic standpoint, as consumers expect increasing inflation, they often pull forward purchases, increasing demand and higher demand, price.  Therefore, in a way, the expectation of inflation can drive inflation.   This is important as much has recently been written and said about higher inflation driving down real yields and as we have stated in the past, the price of gold is recently inversely correlated to real yields (as real yields fall, the price of gold rises).    I believe the graph below, Figure 5, tells an interesting story regarding inflation and expected inflation.  Immediately after the initial Fed COVID package occurred the University of Michigan inflation expectations rose significantly to a level just above peaks in 2015 and 2018.  But the short-term level has not risen higher, even with the numerous doomsday scenarios regarding fiat currencies.   Unless the short term inflation expectations continue higher or actual treasury rates continue to fall, it appears that upward pressure on gold due to real yields will be limited for the foreseeable future.

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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.

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