- When everyone’s going one way, we’re getting to a turning point
- Silver Managed Money short at over a three-year high
Last week saw a major wash-out in both gold and silver as the markets finally buckled under the head of pressure that was building up and the increasingly negative technical picture. While the U.S. markets were closed for Independence Day on Monday 4th, gold continued to trade in an extremely narrow range between $1,804 and $1,812; the damage was then done on Tuesday 5th with the States back in action; the last straw was the surge in the dollar to twenty-year highs on increasing fears of a global recession on the one hand, but also the conflicting fact that factory orders came in at +1.6% after a call of +0.5%, which underpinned concerns that the hawks on the FOMC might get the upper hand in the late July FOMC meeting.
This was one of those situations when markets will take every development either as bullish or bearish depending on mood, regardless of the most likely logical impact of fundamental and background developments.
Allied to this was an increasing feeling that, partly because of the economic risks posed by the energy fall-out from the Ukraine war, the ECB might be more cautious about when to implement rate hikes in the battle against inflation, thus driving investors towards the dollar.
The gold rout was in high volume last week, COMEX active contract, price, and turnover
Ordinarily, as we mentioned last week, circumstances like these would be seen as positive for gold, given that they all feed into uncertainty, and especially as real interest rates remain negative, but the bears had the upper hand in the belief that the dollar would remain the safe haven of choice.
As well as the bearish construction of the moving averages, with the shorter tenors lying below the longer ones, gold completed a double-top formation on the longer-term chart last week, and gold ETFs continued to leak metal. From the start of June through to 5th July inclusive there were 25 trading days of which only nine experienced inflows; the net movement overall was a redemption of 46t and a net dollar outflow of $2.7Bn. Another 18t have gone out since then, leaving overall holdings at 3,754t. So, the percentage drop over the period from the start of June was actually only 1.6%, which is not excessive, but it continues to command press attention.
Furthermore, the CFTC figures, which reflect the positioning on COMEX at close of business on Tuesday 5th, show some moderately aggressive moves, at least some of which would have been triggered by technical programmes, momentum trading, commodity timing advisors etc; long liquidation was 36t and fresh shorts amounted to 59t, taking the net long to just 53t, against a twelve-moth average of 252t. The silver move was more dramatic, with long liquidation of 276t to 6,000t and fresh shorts of 1,250t to 7,405t. The net position thus swung from 120t to a net short of 1,406t, the largest net short position since 4th June 2019. Even at the height of the markets’ 2020 pandemic meltdown silver’s net position bottomed out at a net long of 1,776t.
Now it can be argued that having completed the double-top, gold fell by the amount that the completion of that formation would forecast, when it reached $1,740 and thus that that influence is now neutralised. So, the burning question now is whether it continues to slide or whether there is scope for a bounce.
As things stand, there are arguments that make a case for an improvement.
- The double-top has been completed and rounded out
- The Fed Minutes were expecting core PCE (its most closely watched parameter) to be 4.1% this year and then to step down to 2.4% in 2023 and 2.0% in 2024, so the front-loading in the rate cycle should be discounted in the markets by now (and therefore a 75-basis point hike in July should be priced in)
- The Indian market is now absorbing a net 5% increase in import duty and business is expected to return (although the monsoon season constricts this to a degree)
- Other physical markets in Asia are picking up, including some signs of interest in China despite lockdowns, with local premia moving towards $4-5.
- The bond markets are discounting a peak in US rates in March 2023
The next FOMC meeting is on the 26th and 27th of this month.