While the gold market finished sharply lower yesterday it showed signs of holding up to the significant pressure flowing from the rally in the dollar. This morning gold and silver are showing positive traction in the face of a minimally higher US dollar and a risk on environment from talk of a budget deal and from gains in equities.

While the "action" in gold and silver so far this week has been impressive, persistent strength in the dollar recently makes the bull case suspect and vulnerable. The market was aware of increased Chinese central bank gold holdings for January already but that was the second straight month of increased holdings and some traders are suggesting that China is now building reserves as a hedge against slowing and financial turmoil.

The December expansion of Chinese gold reserves was the first "build" since October 2016 and that news is joined by World Gold Council figures suggesting 2018 was the second largest year of gold reserve building among central banks in history. We hesitated to suggest that hopes of progress on major geopolitical problems resulted in some safe haven liquidation of gold and silver yesterday, and seeing the higher gold and silver action early today in the face of talk of a US Budget deal, clearly suggests precious metals aren't being driven by safe haven forces.

While a couple hours of strength in the face of sporadic dollar strength and higher equities isn't enough to suggest gold and silver have switched toward a physical demand focus, that potential could be increased if US equities soar off confirmation of a US budget deal and the gains in gold extend. Overnight gold derivative holdings increased by 14,561 ounces while silver derivative holdings declined by 1.2 million ounces. As we have indicated before a solid bull market manages to shift its focus to extend its upward track!

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