What A Week!
April 11 (King World News) – Alasdair Macleod: Measured in gold, the dollar’s decline is accelerating as foreigners bail out and gold is the go-to refuge. It is a panic on a global scale which looks like only just starting.
After last week’s dramatic selloff, gold and silver rallied this week, spectacularly in the case of gold. In early morning European trade today, gold was $3221, up $190 from last Friday’s close — a new record level. Silver was $31.46, up $1.88. But since last week’s dramatic selloff, silver has been left way behind gold, reflected in our headline chart.
So what’s driving these two metals?
Part of the reason for this disparity is that Comex dealers have a better understanding of industrial demand factors than of money. This has led them into the wrong contract, which is illustrated in the chart below of price and open interests. Open interest in gold recently collapsed from 574, 824 to 449,087 contracts on Wednesday or 125,737 contracts (equivalent of 391 tonnes) taking it towards oversold territory, while on balance the price barely moved. In silver, the decline in open interest was more modest, while the price fell heavily. Previously, open interest and the price had been moving together in normal bullish fashion, suggesting the price was more vulnerable to unexpected shocks.
When silver is valued as an industrial metal, its price correlates with copper. Both metals initially soared on tariff fears, then fell back heavily when markets became scared of the recessionary consequences. Gold however reflects fears for the dollar and has caught paper markets on the hop.
Other than the gold price itself, the best illustration of the dollar’s plight is its trade weighted index: Ouch! This is a collapse against other currencies which are hardly paragons of virtue themselves. Not only is this a classic dollar bear market, but the momentum to the downside is consistent with becoming self-feeding.
What gold and the TWI chart are telling us is that taking everything into account markets now expect the dollar to lose purchasing power at an alarming rate. Consequently, we can kiss goodbye to prospects for interest rate cuts and lower bond yields. Instead, they will have to rise in the coming months which is bound to be a nasty systemic shock.
Let that sink in for a moment.
We can now sense the future direction of bond yields, and our next chart is of the 10-year UST note confirming worst fears:
KING WORLD NEWS NOTE: Soaring Interest Rates Will Shock The World And Rock Global Financial Markets It is being sensed already, but when the pecked line is broken all dollar credit values will slide. Equity and bond values are bound to fall heavily, and foreign holders of some $32 trillion of onshore dollar assets including $14 trillion of equities will flee from not only the assets, but the dollar as well.
The question then arises as to the consequences for other currencies, which are likely to be damaged by the lethal combination of higher US bond yields, their own debt traps, and severe equity bear markets.
This is painting a very dark picture, but it is getting difficult to see how this deterioration in US and global credit values can be avoided. For now, it is only a matter of Trump’s administration undermining the dollar’s credibility. We need to monitor how market opinions elsewhere reflect these fears.
