While the situation in the Gulf continues to simmer, headlines threatening retaliation have been absent on the issue and therefore gold has largely spent this week chopping sideways. However Saudi Arabia has indicated it would produce "material evidence" connecting Iran with the attacks on their oil facilities and that could be a fresh ignition point for Middle East tensions and it would revive safe haven buying of gold and silver.
Another issue that might lend some support to gold and silver prices today is the surprise fluctuations in US repo rates which many have discounted as a mere mechanical/technical aberration. Apparently bank access to typical cash supply dried up this week resulting in interest rates spiking to as high as 10% for overnight money. Subsequently the Fed quickly injected $50 billion which was the first such large injection since the financial crisis and that has put the situation in the headlines.
However few financial markets outside the rate area showed concern for the situation but eyes will be focused on today's money market operations. Some are suggesting that the Fed's reduction of its QE holdings of treasuries and mortgage-backed securities resulted in a shortfall of reserves and in turn caused a funding "squeeze".
With the afternoon FOMC meeting decision looming we suspect gold and silver prices will find support from the mid-September consolidation low levels early on but we are a little concerned that a mere 25 basis point cut could be cause for a "sell the fact" setback in prices later today.
Fortunately for the bull camp exchange traded funds added 92,352 ounces to their gold holdings yesterday bringing net purchases this year to 8 million ounces. However ETF's saw outflows of silver holdings of 2.98 million ounces reducing this year's net purchases to a level under the 100 million ounces mark.
The markets should see some support from a private forecast indicating central bank gold purchases could reach levels above 500 tons this year and that is significant as the two largest consumers of gold (China and India) purchase around 1000 tons a year.
While the trends in gold and silver look to remain up over the intermediate term, we wouldn't be surprised to see a slight letdown in prices following this afternoon's Fed press conference. In fact, if the Fed reduces rates by only 25 basis points, that could prompt some long liquidation as we think gold and silver prices into their recent highs were partially hopeful of a 50 basis point rate cut.
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Non-Reliance and Risk Disclosure: The opinions expressed here are for general information purposes only and should not be construed as trade recommendations, nor a solicitation of an offer to buy or sell any precious metals product. The material presented is based on information that we consider reliable, but we do not represent that it is accurate, complete and/or up to date, and it should not be relied on as such. Opinions expressed are current as of the time of posting and only represent the views of the author and not those of Zaner Financial Services LLC, unless otherwise expressly noted.
