Welcome to a very brief overview of the recent performance in the markets. The essentials are captured in the table below and each week we will show a chart of interest.
It may have felt like a whirlwind, but it was all within trend
Last week’s sharp moves in gold generated all sorts of headlines that reflected the febrile atmosphere in the market, and it felt, early in the week when gold was dropping heavily, as if there was a sea-change in attitudes towards risk and gold’s role as a risk hedge. Standing back and looking at the moves, however, show that while the 2020 uptrend was tested, it has so far proved resilient. As the second chart shows, the heavy fall on Tuesday took intraday spot prices to just below the lower boundary of the uptrend, but the test was short-lived and as conditions have settled prices have consolidated in narrow ranges since, centred around $1,940.
There was certainly one headline that described Tuesday’s move as gold’s largest fall in history, but this is not the case; we have looked back over the past forty years, from when gold touched $850 (which, in U.S. inflation-adjusted terms, is still the record, equating in today’s money to $2,822). This table here shows that in absolute terms the largest individual fall was in April 2013 as the ETFs were heavily sold (fund managers deciding that the crisis was over and that gold had done its job, and started asset rotation) while in percentage terms the largest fall tends to be overlooked because prices were so low at the time; this was the drop in September 1982, thus:
Long-term gold price action
The sell-off at the start of last week was much needed as it took some froth off the market and shook out a number of weak-handed holders; much of the move was in Asia and it is also of interest that as the fall developed, it generated a degree of panic selling from domestic investors in at least one country, in fear of further falls. Whether they come back into the market if prices continue to stabilise remain to be seen.
Meanwhile the Exchange Traded Funds can affect sentiment in circumstances such as these because of their transparency, with daily reporting; in other words, they can become price makers rather than price takers. To that end the funds were net sellers throughout last week, but the volume was only very small, amounting to just 16 tonnes, or just under half of one percent.
The Commitment of Traders numbers for the week to last Tuesday, the day of the heavy fall, saw a decrease of 31t or 6% in the managed money long positions and an increase of 19t or 11% in the shorts, taking the net long position to 304t, the lowest since late June.
What is also interesting here is that the profit taking and long liquidation in silver was much more extensive, with longs contracting by 11% and silver shorts increasing by 6%. Net silver managed money longs, therefore, dropped by 25% of 1,302t to a 12-week low. As is usually the case, when gold is moving sharply, silver will be aggressive; from a high of $29.86 (intraday) on 7th August, silver dropped to $23.44 (22% over four days) and has subsequently recovered and also consolidated. Like gold, silver did not break out of its uptrend.