Gold price pausing for breath

Gold is pausing for breath between $1,925 and $1,950. All eyes are on the Fed, and interest rate policy. While the labor market is tightening slightly, it’s broadly steady on balance over the longer term. Silver is tracking gold, and the ratio is holding steady. Elsewhere, economic news is weak: European PMIs were disappointing again, and there was more bad news from China, with continuing support for the yuan. For now, bullion markets are cautious and, barring any exogenous shocks, we can probably look for prices to drift in the near term ahead of next week’s Fed meeting.

Gold recovery paused

We noted last week that gold’s rally was reasonably healthy and that prices had probably risen far enough for the time being. Since then, gold has eased from the resistance offered at $1,950 and slipped back towards $1,920, where it is finding cautious support. Silver has moved in tandem and is finding support at $23. The gold/silver ratio is holding steady between 83 and 84.

Markets seem to be becoming more attuned to the idea that the Fed could still raise rates in next week’s meeting, though the balance of opinion still favours the idea that if there is going to be another hike it would come in November. The Fed’s Committee members are now in their ten-day purdah so we will hear no more pronouncements from them until the Statement and Jay Powell’s Press Conference next Wednesday 20^th September.

Gold and ten-year bond yield

Source: Bloomberg, StoneX

Bond markets’ Implied fed funds target rate

Source: Bloomberg.

Fed’s Beige Book

Probably the key development in the United States last week was the release of the Fed’s Beige Book, a regular study undertaken by different Federal Reserve Banks, culling views from businesses, investors, and influencers. These results are from economic stakeholders around the country rather than bankers themselves, and it’s a key document which the Fed relies upon when framing monetary policy. In summary, most Districts indicated modest economic growth in July and August (with results collated on or before 28^th August.)

Consumer spending on tourism exceeded expectations and surged with what most contacts regarded as “the last stage of pent-up demand for leisure travel from the pandemic era”. Other retail spending, however, continued to slow. Some Districts are suggesting that the pandemic driven growth in domestic savings has now been worked off and that some spending is being funded by borrowing. New auto sales expanded in many Districts, but this is being put down to better availability of inventory as opposed to increased consumer demand. New orders were stable or declining, backlogs are shortening on waning demand for manufactured goods, and supply chains continue to improve.

Monitoring the impact of rate rises

This Beige Book’s report was little different from the Fed’s Staff’s economic views in the Minutes of the most recent Committee meeting, released on 26^th July. Fed Committee members increasingly talk about monitoring the lagged and cumulative effect of monetary policy on economic activity. The Beige Book is likely to be seen as “neutral” in this context, and it gives further support to the belief that the current interest rate policy is working.  Nonetheless, remember that Jay Powell has been telling us that interest rates could stay higher for longer as the Fed battles to regain the 2% inflation target.  An increasing numbers of market observers think that 2% inflation is not viable but also that the Fed is unlikely to want to be seen to capitulate on that target.

Chinese buying gold

There have been some signs of bargain hunting in gold and silver markets in the past few days. China reported an increase of 29 tonnes in its gold reserves, the tenth consecutive month of reported increases, taking China’s holdings to 2,165 tonnes. This would have been valued at $1.8 billion, or 4% of China’s combined gold and forex reserves, at end-August prices. China’s foreign exchange reserves declined during August, something partly attributed to its to the defence of the currency as the yuan declined.  The Head of China’s State Administration of Foreign Exchange, Zhou Maohua, referred to the increase in gold holdings as “primarily aimed at optimizing the structure of official reserve assets, promoting diversification of official reserve assets, and enhancing the ability to withstand global financial market volatility and asset stability”.

Trading

ETPs

The Exchange Traded Product investors have been voting with their feet, with net gold redemptions of just under 18 tonnes in the month to 8^th September, leaving holdings at 3,323 tonnes, a drop of 149 tonnes year-to-date. For context, global gold mine production is around 3,650 tonnes annually. Silver ETPs have also been losing metal, with 336 tonnes leaving ETP products in eight consecutive trading days, to stand at 22,088 tonnes.  For context, global silver mine production is  around 23,600 tonnes annually.

COMEX trading

Gold

Latest numbers from the Commodity Futures Trading Commission (CFTC), which date to 5^th  September, show that the gold price assault on $1,950 at the start of the month was accompanied by short covering by Money Managers. This data is effectively a week out of date, but it gives us some guidance.

The subsequent retreat from that price level saw some light liquidation among the longs. Consequently, outright longs declined by just one tonne and shorts contracted by 36 tonnes.  This took the net long position to 157 tonnes, more-or-less in line with the twelve-month average of 152 tonnes.

Silver

Silver saw reduced exposure on both sides, with 857 tonnes of long liquidation and short covering of 354 tonnes, taking the net long position to 2,146 tonnes, well above the twelve-month average of 1,502 tonnes.

Gold, silver, and the ratio, short-term

Source: Bloomberg, StoneX

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

Contact: Rhona.Oconnell@stonex.com.