All of which is bearish for the dollar in the short-to-medium term
Spot gold over the past twelve months
Since our most recent note, a fortnight ago, the markets have had the Jackson Hole Symposium to absorb, disappointing employment numbers from the United States, members of the European Central Bank talking of closing out the pandemic support programme earlier than planned (and possibly not even using all the allocated funds), not to mention widespread dismal automotive numbers, which latter points to continued pressure on the platinum group metals.
The first three of these four elements are all moderately bearish for the dollar, although as the below chart shows, it is arguable that some of this is priced into the dollar already. Jackson Hole has been interminably discussed over the past week, but essentially Jay Powell adhered to his dovish stance although he did say that in his view that economy had more or less achieved the “substantial further progress” test with respect to inflation (targeting an average of 2%, although the period over which the average is calculated has not been closely specified), and – at that point- employment had shown signs of improvement. He did hint that tapering (i.e. the reduction in the pace of central bank asset purchases) could start this year.
Last Friday’s nonfarm payroll numbers sent large ripples through the market, coming in with a gain of just 235,000 against expectations in excess of 700,000; the unemployment rate now stands at 5.2% and while this has continued the improvement from the peak of 14.8% in April 2019, the rate of change is continuing to slow and current levels are still a long way above the target of maximum employment (i.e. unemployment no higher than 3%). The surge in the delta variant of COVID19 was one of the key elements behind this slowdown in hiring, reflecting a slowdown in the leisure sector, although the growth in manufacturing employment was a paltry 25,000.
One good element was an increase in transportation and warehousing, which hopefully points to an easing in supply chain bottlenecks that have hamstrung several industries, most notably the automotive sector with particular reference to semiconductors – not just the chips, but also their assembly into circuit boards as the boards themselves also need chips in their own manufacture.
All of this has helped to sustain gold’s recovery from the heavy sell-off earlier in August and there is still evidence of excess liquidity in the market looking for a home with at least two major funds reporting increased gold holdings so far this year. On COMEX, the activity in the week to last Tuesday 31st August saw an increase in both longs and shorts (managed money), taking the net long to 254t, an increase of 144t since the week of the sell-off, but still 45% below the average of the previous two years of 394t. In the silver market the past two weeks have seen a small contraction in what had been the largest outright short since November 2019 along with some light buying. Until the non-farm payroll numbers last week silver had been underperforming gold’s recovery as it kept its eyes on the economic conditions since almost 60% of silver demand is in industrial uses, but it came to life on Friday with gold’s 1.0% rise outshone by sliver’s 3.4% jump. So it is possible that we are starting to see a revival in silver’s interests, especially as buying is returning in India. India is usually the world’s largest purchaser of silverware and jewellery with over 20% market share; the easing in the lockdowns there is starting to unleash pent-up demand, which could well be substantial.
Meanwhile the figures from the United States Mint for the first eight months of the year show that the tonnage of gold Eagles in January-August 2021 was 44% higher than in the equivalent period of 2020, with expenditure up by 47%. The comparable figures for silver Eagles were a 40% gain in tonnage and a 95% rise in expenditure.
The United States Beige Book, which is one of the key studies used by the Federal Reserve in determining monetary policy, will be of particular interest given the apparent bifurcation among members of the Federal Open Market Committee, especially considering the most recent economic numbers. We will review in our next weekly round-up.