Gold consolidation continues, potential for upside later in the year

Gold rallied ahead of last week’s FOMC meeting but then gave back the gains to end unchanged over the week. Silver, by contrast, gained almost 3% over the period and is bucking external influences. This is how we closed last week’s note: “There is currently little in the market environment, barring exogenous shocks, to stimulate fresh activity in this arena so we should continue to expect consolidation for the time being, with the potential for upside later in the year”.  There is no reason to change the view, beyond some possible support from silver.

Fed pauses

The FOMC did indeed pause interest rate hikes, but with room for manoeuvre, as usual. Solid US employment numbers underpin likelihood of a further hike. The EU construction sector is trying to stabilise, but confidence is on its knees. Insofar as China is concerned, the yuan still under pressure. The Shanghai gold price is at 4% premium to loco London. When a range-change eventually happens, gold upside is favoured rather than downside.

Gold is still range-trading even after the Federal Open Market Committee (FOMC) decision last week to keep the fed funds target rate at 5.25-5.50%, with the markets now starting to agonise over the likely course of action from the Committee in the November meeting.

Bond markets’ Implied fed funds target rate

Source: Bloomberg

Gold on the defensive

The fact that the Committee has kept its options open was widely expected, but gold remains on the defensive, at least, and the price is still marking time.  What often happens after long periods of little movement is that the market starts to build up a head of steam, presaging a change of range, usually prompted by an external influence. 

Opinions are divided as to whether the next move will be up or down, but the consistent support at and below $1,900/ounce and persistent geopolitical tensions work in gold’s favour, while the problems in Europe and China are helping to underpin the dollar. 

This latter factor is currently more influential on gold price movements than the fact of economic uncertainties, which are normally supportive.  It is theoretically also supportive that the Fed’s dot plot (the grid showing where each member expects the fed funds target rate to end this year, next year and further out) was more aggressive than the markets had been expecting.  Normally this would dent gold’s position, but it has been largely shrugged off this time.

Gold and the weighted dollar index

Silver resists pressure

What is interesting here is the action in silver.  When gold is moving sideways silver will often turn to its industrial nature rather than its reputation as a precious metal.  Remember that silver’s “precious” connotation comes from its history as an international currency plus its use in jewellery; this often overshadows the fact that roughly 60% of silver’s demand is industrial and so it has a dual personality.  It thus has a reasonably strong relationship with copper and the fact that copper has been in retreat since the start of August should be undermining silver’s price action.  Since the start of August silver has also lost some ground, but to a lesser extent than copper and, more significantly in the short term, silver has been gaining ground since mid-September while copper has been falling.

So, a sideways gold price and a falling copper price would normally be expected to put silver under pressure, but this time this is not the case.  There are two possible reasons for this; one is the fact that silver is (currently, at least), vital to solar cells and that industry is booming, with some estimates expecting a 40% gain in demand this year against 2022.  This is important for investor sentiment. 

As far as the fundamentals are concerned, even this rate of growth in solar is not enough to stop silver, in our estimates, from posting a surplus this year and it will therefore mean that rising prices will need help from the investment community.  That is not happening at the retail level, so we need to look at the activity of the professionals. 

Which is where we come to the second potential explanation for silver’s outperformance in recent days, even though that outperformance is relatively small.  Investors and / or speculators may be taking long positions in silver ahead of doing something similar in gold. 

This is common practice.  Silver’s higher volatility often prompts gold speculators to trade silver as well because it gives them additional leverage; and because silver is a small market, they will often approach silver before they look to trade in gold.  This applies both to buying and selling. So, we now need to look at recent silver ETP and COMEX activity to see if they give us a clue.

CTFC data

The CFTC figures don’t tell us much.  In the week to Tuesday 19^th September, silver dipped then rallied, opening at $23.08 on 12^th and closing more-or-less unchanged at $23.20 on the 19^th.  That doesn’t mean that we shouldn’t look at the numbers, though; they tell us that over that week outright long Managed Money positions rose by 3% or 158 tonnes, and shorts contracted only very marginally, by less than 1% and taking the net long to 218 tonnes against a twelve-month average of 1,647 tonnes.  Over the past four weeks to 19^th September, changes in longs and shorts have more-or-less cancelled each other out, with losses of 610 tonnes and 606 tonnes respectively. So, no immediate guidance there.

COMEX Managed Money Silver Positioning (tonnes)

Source: CFTC, StoneX

ETPs

The Exchange Traded Products do shed a little light on the situation.  In July and August combined, the silver ETPs lost 953 tonnes, or 4% of end-June holdings.  In September sentiment has been more positive, with seven days of creations from a total of 16 trading days, for a net gain of 170 tonnes.  So, we can – just – argue that silver is starting to attract attention and by extension this could spill over into gold.  But we suspect that an external force will be needed to kick-start gold into life.

As far as gold is concerned, the week to 19th September saw gold outright Managed Money longs rise by 3% or eleven tonnes, with shorts contracting by 11% or 29 tonnes.  This takes the net long to 147 tonnes against a twelve-month average of 156 tonnes. 

Exchange Traded Products have seen only one day of creation so far in September, and that was at the end of last week, with a small addition of just two tonnes after losses of 33 tonnes in the rest of September.  Year-to-date, the gold ETPs have lost 163 tonnes (5%) since the start of the year to stand at 3,309 tonnes (world mine production is approximately 3,650 tonnes).

COMEX Managed Money Gold Positioning (tonnes)

Source: CFTC, StoneX

Taken from analysis by Rhona O’Connell, Head of Commodity Market Analysis for EMEA & Asia, StoneX Financial Ltd.

Contact: Rhona.Oconnell@stonex.com.