Dollar Stabilization Takes Shine Off Gold

Thierry Wizman, Director: Global Currencies & Interest Rate Strategist at Macquarie, discusses the path ahead for the Fed and the geopolitical headwinds driving FX moves.

The dollar’s recent stabilization has stripped away the easy narrative that powered the early signs of the debasement trade through the summer. Gold and crypto are now consolidating after an overextended run.

By early October, gold was trading more than two and a half standard deviations above its recent average -- a statistical sign of one-sided positioning. The rally then lost steam as fresh buyers began to thin out.

Bitcoin traced a similar path, holding firm but no longer accelerating, while in the background the dollar steadied after months of decline. What was a one-way hedge against perceived fiat weakness is turning into a more balanced market as currencies adjust to a steadier backdrop.

The unwinding of earlier crowding into gold and crypto as the dollar eased now appears to be the main force behind price action. Gold and Bitcoin’s momentum have been closely aligned in recent weeks, with a correlation of about 0.6, while gold’s z-score has risen alongside the dollar’s by a similar magnitude. While they’re diverging, bullion and the greenback are moving in sync, and that’s a sign that positioning rather than macro fundamentals is setting the tone.

Silver surged toward a record above $50 an ounce as a historic squeeze deepened in the London market.

Spot prices rose as much as 3.7%, closing in on a peak set during a notorious attempt to corner the global silver market in the 1980s.

This time around, the jump in prices has been driven by a flood of investment into the precious-metals markets as investors seek security in the face of fiscal uncertainties in the US, concerns over an overheating stock market and threats to the Federal Reserve’s independence.

Silver is up more than 70% this year, far outpacing gold’s advance. In the past week, the rally has accelerated amid growing signs of stress in the London market, the epicenter of global bullion trading. The cost of borrowing the metal for one month in London reached an annualized record of 35% on Thursday in a sign that the volumes readily available to buyers have sunk to critically low levels.

Earlier this year, fears that the US could levy tariffs on silver spurred a rush of metal to New York, drawing down inventories in London and reducing the amount of metal available to borrow. Much of the silver in London is held in vaults backing exchange-traded funds, and not readily available to buy or borrow on the market.

The tightness in London has meant a typical premium of a few cents for futures in New York collapsed into a discount of more than $2.50 an ounce below spot prices.

The scale of that dislocation may end up easing tightness in London as traders buy cheaper metal in the US and ship it to the UK to capture the difference. But for now, the squeeze is driving prices closer to the $52.50-an-ounce record from 1980, set on a now-defunct contract on the Chicago Board of Trade exchange.

That record was set when the Hunt brothers, Texan oil billionaires and notorious speculators, tried to corner the global market over fears of inflation. They stockpiled more than 200 million ounces, driving the price above $50 before it crashed below $11.

On Friday, spot silver traded up 2.4% at $50.45 an ounce as of 3:26 p.m. London time. Palladium jumped 3.1%, while gold and platinum edged higher.

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