- Continued interest in gold; sentiment improving
- A mighty nonfarm payroll number takes some of the wind out of gold’s sails
- As silver continues to outperform, which is bullish
- Fed doves turning hawkish
Silver much perkier than gold as we write (8th August)
After a 5.6% rally in week to Monday 1st August, and an accompanying 12.2% move from silver as sentiment started to turn away from interest rate hikes and concentrate more on geopolitical risk, gold and silver spent most of last week consolidating. Gold opened the week at $1,772 and closed at $1,778; silver started at $20.23 and finished barely changed, but there was some lively activity in between. The primary short-term move was the reaction to the heightened tension between the United States and China over Taiwan after Nancy Pelosi’s visit. This was the trigger for gold’s assault on $1,800, a move that failed and which also saw a spike in the gold:silver ratio – and silver’s reluctance to follow suit does suggest that gold’s move was a little too enthusiastic.
What is particularly interesting, though is the reaction to the U.S.’ nonfarm payroll figures on Friday. These were massively in excess of expectations with an increase of 528k compared with a market call of 250k and prompted chatter that, despite the second consecutive quarter of GDP contraction (the strict technical definition of a recession), the red-hot labour market suggests otherwise. Unemployment is now down to 3.5%, the lowest since 1969 – a 53-year low.
The dollar strengthened sharply and put pressure on gold, which dropped $25 from just below $1,790 to $1,765, but prices corrected and since then have been steady, centred between $1,775 and $1,780, with a mildly bullish bias. A few months ago the correction would have been deeper and longer-lasting.
The Fed clearly remains on red alert and some of the most dovish Committee members are now turning overtly hawkish and focusing on the inflation numbers. Even super-dove Neel Kashkari, the Minneapolis Fed President, has been quoted as saying that the US economy is a long way away from the 2% target. After spending most of last week expecting a 50-basis point rate cut at the FOMC meeting on 20-21st September, the markets are now expecting further aggressive action, although we must bear in mind that this is six weeks away and there will be a lot of economic data flowing through before then. The September meeting will include special economic projections and the latest iteration of the dot plot, in which the Committee members record the levels at which they expect the fed funds target rate to end this year, next year, and further out.
Physical demand had picked up smartly in the price-elastic regions, but it is possible that this recent rally will have seen some of that slowing again. We are also in Monsoon season in India, which will further fetter gold demand, although silver demand, having collapsed in 2020, is still playing catch-up after starting to recover last year.
Activity in the Exchange Traded Products went into reverse. After three days of creations at end-July and 1st August, which added 4.2t, the gold funds have since lost 14.7t. Silver added 97t in the middle of last week but have subsequently redeemed 41t. In the Managed Money arena, the week to 2nd August, during which the two metals’ prices had appreciated so clearly, saw some very heavy short covering in both gold and silver. Gold added 14t of outright longs and the shorts contracted by 27%, from 346t to 251t, which compares with the average over the previous twelve months of 108t. Silver, meanwhile, was pulled in both directions with a 594t (10%) contraction in outright longs, but a hefty 2,034t or 23% reduction in shorts from 8,767t to 6,733t. These moves take gold back into net long, at 49t, while the silver net short has contracted to 1,424t.
So sentiment is still uncertain. After weak-handed holders were washed out of the market during July, there has obviously been short-covering activity and some renewed buying at the grass roots level. There are still signs of more bullish sentiment than for a long while, but it is probably fair to say that the jury is still out. Gold was overbought at the end of last week and is correcting slightly, while the 50-day moving average is offering resistance just below $1,800. Silver is in a similar position. Support from the 10 and 20-day averages and resistance from the 50-day, at $20.35.