- Gold now in a net short on COMEX Managed Money
- Silver Managed Money short at over a three-year high
We have seen another big sell-off in gold and silver and this time it was triggered by the U.S. Consumer Price Index (CPI), which was released on Wednesday 13th and then compounded by a high Producer Price index (PPI) number, which suggest that the inflationary forces in the US economy are not yet abating. On the other hand, however, the trend in the Core Personal Consumption Index (PCE), which the Federal Open Market Committee sees as one of its most highly favoured indicators, is declining (probably due to high energy prices which are constraining spending). The Beige Book, which is a Survey of businesses, economists, market experts and other sources and which the Fed uses to guide monetary policy, was also released last week and this time several Districts were reporting a slowdown in demand, and contacts in five Districts reported concerns over an increased risk of recession.
United States: Gauges of inflation
While the sharp fall in gold was triggered by the CPI number, with spot prices tumbling to trade briefly below $1,700, the weakened sentiment in the market was already well underway, with the CFTC numbers (released on Friday) for the close of business Tuesday 12th, showing that Managed Money positions were net short of gold after 35t of liquidation and 37t of fresh shorts over the preceding week, While only a small net short position of 19t at that stage, those numbers will make for very interesting reading this coming week as we assess how the market played out.
Meanwhile silver remains more closely affiliated to copper than to gold at the moment (remember over 60% of silver fabrication demand is industrial), with the gold:silver ratio now at 91, having been up to 93 last week. The year-to-date correlation between copper and silver is 0.91; with gold it is 0.89.
Long-term 40-day correlation between silver and copper, and silver and gold
The CPI number came in at 9.0% Y/Y with core at 5.9%, both on a seasonally adjusted basis. The month-on-month basis may in theory well be more appropriate given that we still have some dislocations in the June 2021 figures on the pandemic legacy, but here too there is the obvious caveat revolving around the impact of the war in Ukraine. That said, the month-on-month gain was 0.7% after 0.6% in June, and which equates on a linear extrapolation to 8.7% year-on-year. Within the CPI, as calculated by the U.S. Bureau of Labour statistics, food, and beverages account for 14.3% of the total (food is 13.4% of the total), housing is 42.4%, Apparel is 2.5% and Transportation is 18.2, with new and used motor vehicles accounting for 9.2% and motor fuel, 3.8%.
The PPI number was released a day later, came in at 0.8% M/M and 11.3% Y/Y. The core numbers were 0.4% and 11.3% respectively. Stand-out numbers included a 54% increase year-on-year for Final Demand Energy with a 72% increase in Government Purchased Energy and an 87% rise in Energy for Export. Producer Output prices were up by 18.4%, with finished Goods Less Energy posting a 9.9% gain while finished foods excluding foods, we up by 19.8% and finished services, “just“7.4%.
The German ZEW economic expectations index
So, as we noted last week, while inflationary fears should in theory be supportive for gold, the strength of the dollar and the relative interest rate arguments continue to hold centre stage, especially as the poor state of the European economy, exacerbated by the Ukraine situation, mean that the ECB has little room for manoeuvre for the foreseeable future. This was confirmed by the ZEW investor Expectations Survey last week. This survey interviews up to 300 experts from the financial sector and from the financial divisions of some corporate entities. Their outlook from growth came in at a near-disastrous minus 53.8 last week, almost as low as the numbers in as the Global Financial Crisis unfolded in mid-2008.
The next FOMC meeting is 26th and 27th July; the markets are currently discounting a 75-basis point hike, having looked in mind-week last week at the possibility of 100 points and still expecting the rate to peak in Q1 2023
The next FOMC meeting is on the 26th and 27th of this month.