In response to concerning developments in US regional banks, gold and silver demonstrated strong performance throughout the week.
During European trade this morning, gold reached $2039, marking a $53 increase from last Friday’s closing price. It briefly tested new high levels, while silver stood at $25.88, representing a gain of 90 cents. The rise in prices led to increased trading volumes on Comex. Notably, gold’s Open Interest is shifting towards neutral territory, indicating a more balanced market sentiment, although silver remains slightly oversold.
Higher Open Interest Levels and Unique Market Situation Impacting Trading History
In recent times, the charts have depicted even higher levels of open interest, posing challenges for technical traders to interpret trading history accurately. It is important to acknowledge that the current circumstances differ significantly from anything witnessed since the 1970s. Given the likelihood of the Federal Reserve’s interest rate hiking cycle coming to an end, or the potential occurrence of a banking crisis, there exists ample room for increased buying of Comex futures.
Specifically, the subsequent chart illustrates Managed Money net positions, representing hedge funds. It clearly demonstrates a skew favoring a rising gold price, indicating that the average net longs in this category are neutral when viewed from an overbought/oversold perspective. These factors contribute to the unique dynamics observed in the market at present.
Gold Price’s Bullish Chart Indicates Potential for Further Gains
From a technical standpoint, the chart of the gold price appears strongly bullish, nearly perfect in its pattern. The key question now is how long the price will consolidate at or above the previous highs around $2070. Once this consolidation phase is resolved, price targets above $2500 become subject to discussion and analysis.
Underlying this bullish trend is mounting evidence of a banking crisis in the United States, which is expected to worsen. Surprisingly, there is little attention given to problems faced by banks in other jurisdictions. In particular, commercial banks in the Eurozone are grappling with similar issues, albeit with a tightening cycle that commenced later than in the US.
As a result, counterparty risk is heightened, leading banks to further tighten lending standards and reduce overall credit availability. What many fail to realize is that contracting credit often leads to higher interest rates as a reflection of credit shortages.
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This development places the responsibility for credit creation increasingly on central banks. They find themselves in a conundrum, needing to make a critical choice: should they intervene to save their financial systems and prevent an economic downturn, or should they prioritize safeguarding their currencies? It is becoming clear that attempting both objectives simultaneously is a daunting task.
Meanwhile, Chinese banking systems stand out as the only ones experiencing rising share prices. For other countries, uncertainty and fear of potential failures are on the rise. Central bankers and treasury ministries find themselves with limited room to exercise judgment regarding moral hazard in these challenging circumstances.