Sinking dollar sets stage for gold

January 25, 2018
Pat Heller

At the beginning of this week, the U.S. Dollar Index touched a 37-month low. Normally, when the dollar is weak, gold and silver prices tend to rise. That is not what has happened for the past couple of weeks as the metals have become stagnant.

What is going on? There are several possible factors.

Since late December, the number of open gold futures contracts have increased a net of about 14 million ounces. That means that an additional 14 million ounces have been sold short to offset the additional 14 million ounces in long positions. However, the revealing information is which kind of parties are increasing their short and their long positions.

The commercial traders, which pretty much means the bullion banks and brokers, have increased their net short position close to 100 percent of the increase in the total number of outstanding contracts. Most of the increase on the long side has been acquired by large speculators, meaning mostly managed funds of mercenary traders trying to make a profit off a trend. A smaller increase in the long position went to small speculators, meaning individual investors and small trading accounts.

Large speculators tend to be the weakest hands, willing to jump in and out of markets on technical indicators without regard to fundamental long-term supply and demand factors. Generally, if the commercial traders can sell enough short contracts to start pushing down the price, the large speculators will exit large parts of their positions. This dishoarding by large speculators tends to accelerate a decline in the price. But this time around, they are not selling – at least not yet.

The price of gold has closed on the COMEX above the $1,325 resistance point for more than a week now. Normally, that would result in a quick further increase in the price. Why isn’t that happening now?

The primary reason I think gold’s price has stagnated is that gold and silver prices move up or down in tandem about 70 percent of the time. The price of silver has not been able to close on the COMEX above its $17.25 resistance point, which seems to be intimidating the large speculators in gold – not enough to get them to sell, but at least enough to stop their massive buying over the past several weeks.

You might say that silver is the weak part of the gold market. About six times more gold than silver, as measured in current dollar value, is newly mined each year. Daily trading volumes, as measured in dollars, are even many times higher for gold than for silver. As of early this week, there were about $75 billion in open positions on the COMEX gold market versus less than $17 billion in the COMEX silver market.

What that means is that it is easier to manipulate the price of gold by going after silver’s price than trading in the yellow metal itself.

There are some other stories worth watching.

On Jan. 11, a Chinese publication reported that China had deposited with the Federal Reserve a cumulative total of 600 tons (19.3 million troy ounces) of gold beginning in 1990. This was apparently done as a workaround against various U.S. government sanctions on China at the time. Supposedly, the Chinese central bank has repeatedly requested the return of the gold multiple times and been consistently refused by the Federal Reserve.

It may never be known how truthful that report is. To the extent that it may be, that could knock down the value of the U.S. dollar faster than it is already falling.

As of earlier this week, the U.S. Dollar Index was barely above 90. It was above 102 at the end of 2016. Should this Index fall below 90 and not quickly recover, there is a significant prospect that the decline in the dollar could accelerate.

The Vancouver Investment Resource Conference was held this past weekend in Canada. Attendance was dismal a year ago. This time around, advance registrations ran four times the prior year’s pace. This year, attendance looks to have set an all-time record, with many sessions filled with standing guests who could not find an empty seat.

Bullion traders are starting to report that more people are cashing in their profits from the recent run-up in cryptocurrencies and are using the proceeds to acquire physical gold and silver. This is not yet a flood of demand, but it could potentially happen. With stagnant or falling cryptocurrency prices and a weak U.S. dollar, it might occur.

Last week, I talked about even lower premiums at which $1,000 face value bags of 90 percent silver coins were selling. They have slipped a bit more in just the past week. If you shop around, you should be able to find them as low as about 1 percent above the ask silver spot price, delivered.

This offers an intriguing opportunity for physical buyers. U.S. 90 percent silver coins have not been minted for circulation in more than 50 years. At current retail levels, the wholesale value of these coins is enough below melt value to enable refineries to purchase these coins and profitably melt them down to make new 1,000-ounce bars. Thus, look for supplies to dwindle somewhat.

The .999 fine bars, on the other hand, are in current production. When there has been a major surge in the buying of physical silver, all premiums have increased some. However, since 90 percent is out of production, it has the potential to achieve premiums well above its silver content. During the last major surge of physical demand in late 2008, it was possible for sellers to cash out their 90 percent coins for more than 20 percent above silver value. Since the .999 fine bars are in current production, this jump in premiums when you want to sell them just won’t happen.

I already endorsed acquiring U.S. 90 percent silver coins on the basis of their low premium, high divisibility and liquidity. Now I also recommend this form of silver as one that could make an additional profit from an increase in premiums.