Gold, Silver, and Palladium Commentary
August 5, 2020

Both gold and silver continue to make significant gains due to several underlying factors in the market (negative real interest rates, Covid-19, inflationary fears, overvalued markets, political risks, geopolitical tensions, hedging). The ratio of the 1-month Gold contract to the 1-month Silver contract (Figure 1) continued the downward trending, falling another 4% this last week as front month silver rallied 7.2% and front month gold 2.9%. With the front month silver and gold contracts closing yesterday at $26.01 and $2001.2, respectively, the gold/silver ratio is now 76.93, or 18.5% higher than the 15-year average. December Gold (Figure 2) closed yesterday at $2021 and September silver (Figure 3) moved up to $26.03 from $24.3 last week. Both gold and silver have risen 10.2% and 33%, respectively, since July 17.

From an open interest perspective, gold’s open interest is down 5% from 7/17, the beginning of the recent bull run, and down 8.3% from its recent peak on 7/23.  This is different than silver, where silver’s open interest continues to climb, up 11% from 7/17.  Both gold and silver saw drops in the COT net funds positions between the 7/21 and 7/28 reports.  While the number of gold short positions held by the bullion banks are at historic positions, they fell 7.7% from the previous week’s report. The difference between the December and August gold contracts at $19.8/oz, which is similar to last week. We continue to believe that for the longer-term, fear of inflation resulting in negative real interest rates will continue to pressure gold higher.  But does the rapid rise in gold, combined with falling total open interest falling as gold rises, possibly signal this recent rise may be partly an attempt to close shorts?

Now for Palladium. Palladium saw a large move down this last week and even with this move down, the palladium/silver ratio continued to fall, highlighting the significance in the silver move.  Total open interest as well as non-commercial net-position of funds continue to increase for palladium.  Even though total open interest fell last week, it is still climbing with respect to 7/17. The most recent COT report shows net non-commercial positions continue to increase in palladium as well. Continued demand for palladium as well as a continued rise in total open interest should continue to provide support for the metal.

The final thoughts I leave with you today center on the concepts outlined in the opinion article written by Tim Duy on Bloomberg on July 17, 2020. You can find the article here. The concepts outlined in this article could be very important as they outline proposed Fed policy changes on how the Fed may react to economic conditions and how this could affect inflation and real interest rates.  Some believe this signal from the Fed is what has led to the extraordinary increase in gold and silver prices since July 17.  In short, the Fed may place less emphasis on the Phillips Curve for forecasting inflation and instead run the economy hot to drive up inflation, in order to bring down unemployment while using yield controls. We have some reservations about this type of engineering. The Fed’s thinking seems to be that such actions may result in times were inflation runs higher than expected and combined with yield controls may result in negative real interest rates for some time to come (years).  The fact that gold and silver prices have jumped significantly since this time seem to indicate that investors are quickly looking for places to park their money in order to limit issues from negative real rates.

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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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