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Gold and silver off to the races, or is this another false start

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(Kitco News) - It has been an exciting week for gold and silver as prices rally to multi-month highs. Silver is ending the week with solid gains above $23 an ounce, and gold is holding the line at $1,800.

The week caps a significant turnaround on the monthly chart. After seven straight months of losses, gold prices ended November with a 7.5% gain. Silver ended the month with nearly a 14% gain.

Not only has the price action turned bullish, but gold has managed to hold critical support for the last three months. Although sentiment is significantly changing, there is still some hesitancy in the marketplace. Investors may be bullish on gold and silver, but they aren't quite ready to buy it.

We have pointed out numerous times that the gains made in November were the result of short covering, which is not sustainable. We will have to wait until next Friday to see how speculative positioning has changed in the marketplace. However, from what we can see, there is still not a lot of evidence that investors are buying gold to own it.

We can also see this lack of conviction in gold-backed exchange-traded products. SPDR Gold Shares (NYSE: GLD) saw their holding fall by nearly 12.5 tonnes last month, despite the massive rally.

Kevin Grady, president of Phoenix Futures and Options, succinctly described the current price action as markets continue to react to fluid U.S. interest rate expectations.

"You don't want to be short gold if the Fed is going to raise interest rates by 50 basis points," he told Kitco News. "But people are not saying let's get long gold at $1,800; they are saying let's not be short."

Gold still has a Fed problem, even if they slow the pace of rate hikes to 50 basis points later this month.

Friday's November employment report shows just how challenging the current economic environment is for the U.S. central bank. The report said that the U.S. economy created 263,000 jobs last month. At the same time, annual wages increased 5.1%.

The Federal Reserve, if it wants to get inflation down, will need to continue to tighten its monetary policy to slow the economy and weaken the labor market.

Will $1,800 bring the gold bulls back? Analysts look for follow-through buying next week

We may not get any more 75 basis point moves, but investors need to pay attention to terminal rate expectations. Markets expect the Fed funds rate to top out in the first half of 2023 at 5.25%.

Any indication that the terminal rate will have to move higher to cool down the economy and the gold market will quickly reverse these hard-fought gains.

But it's not all doom and gloom; the sentiment in the marketplace has turned to "buying the dips" from "selling the rallies." A recession is coming (many economists would argue that a recession is already here) and the threat only gets worst the more aggressive the Fed gets.

There is only so much the Fed can do to bring down inflation. Once the economy starts to feel the impact of this aggressive action, many are expecting the central bank to reverse course quickly.

It may take a while and there will be some short-term volatility, but for many analysts, the future looks bright for gold and silver.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.