Gold price recovery is on the cards, but it will be hard work

When we wrote last week, gold shed just over $100 or almost 6% and tested $1,830.  Focus was very much on the bond markets’ acceptance of the fact that global Western interest rates are indeed going to be “higher for longer,” and the speed of the falls in bond prices and a range of commodities was, of course, exacerbated by technical trading, momentum traders, algorithms, etc. On balance, therefore, it looks as if the worst is past.  But these markets need time to lick their wounds and rebuild confidence.  This may take some time.

Silver recovers sooner than gold

Gold / Silver Ratio

Source: Bloomberg, StoneX

The low silver prices were posted on Tuesday, with silver briefly dipping just below $21, a 17% fall from the August peak of $25.01 on the 30^th of the month. After a couple of days recuperating, Friday and again this morning has seen a recovery, with the 23.6% Fibonacci retracement completed at the start of this week at $21,73, and26,500t gains have been further extended since; as we write, spot silver is trading just over $20.60.  

Gold’s low was later as prices continued to respond to bond market activity.  There was a period of range trading, as there was in silver, but still posted a series of fractionally lower lows and lower highs, and prices hit a low of $1,810 on Friday before recovering.  This drop was a 7% fall from August’s high of $1,947.  Friday saw a rally despite good US employment numbers (clearly a sign that gold had been oversold). 

Geopolitics rears its head

This morning, the price gapped higher in response to the troubles in the Middle East, with the pre-auction indications starting at $1,855 (the high for the session) after a close of $1,833 on Friday.  As we write, the spot is at $1,845, a 24% correction of the fall from the August high and unwinding an oversold position.

Gold versus S&P 500

Source: Bloomberg, StoneX. 2nd January 2013=100

Geopolitics aside (mainly the worrying developments in the Middle East over the weekend), the markets are now settling down after last week's mass exodus.  In the precious sector, at least as far as gold and silver are concerned, there is some sign of physical interest appearing in the markets, and this, of course, is helped by the re-opening of the Chinese markets after Golden Week and the Shanghai premium over London is currently $90 or 5%, even though it is being reported that some quotas have been allocated.

Physical demand has also picked up among retail purchasers in the coin and bar sector, with plenty of activity late last week and especially over the weekend; the price rally at the start of this week has slowed things down, so it is fair to say that while there is some pent-up interest in the market, not every-one yet has the courage of their convictions.

Gold and the VIX index

Source: Bloomberg, StoneX

Gold ETPs are down since the October 2020 peak

In the ETP sector, gold has remained friendless. Gold ETPs are down over 660 tonnes since the October 2020 peak.The most recent day of creations was 27^th September, which was only 0.54 tonnes. There have only been ten such days since the start of July.   Over that period, the funds have shed 167 tonnes for a net dollar outflow of $10.7Bn; for the year, the change is 215 tonnes, compared with a fall of 110 tonnes last year and 189 tonnes the previous year.  The peak holding was in October 2020, at approximately 3,920 tonnes, whereas we are now at 3,258 tonnes.  Global gold mine production is roughly 3,680 tonnes.

Silver funds, by contrast, have seen some bargain hunting appearing over the past couple of months. At the same time, there have only been 26 days of net creations since the start of July (net loss of 724 tonnes over the period); 12 days were in September, including the past three days.  Current holdings stand at 22,493 tonnes compared with global annual mine production in the region of 26,500 tonnes.

Futures positioning: net short in both metals

On COMEX, both metals went into a net short position in the Managed Money sector in the week to last Tuesday – given that was the low point for silver and gold had had a big clear-out, that will not come as a surprise. 

Gold

• Gold shorts added 52 tonnes or 18% in the week; since the start of September, they have added 119 tonnes, a gain of 55% over the period
• Gold longs shed 44 tonnes or 12% in the week; since the start of September, they have come down by 61 tonnes or 16%
• Last Tuesday, gold was in a net short of 24 tonnes, the first net short since early November last year

Gold COMEX positioning, Money Managers (tonnes)

Source: CFTC, StoneX

Silver

• Silver shorts added 678 tonnes, or 15%, over the week
• Longs contracted by 530 tonnes or 10%, taking the net position into a short of 362 tonnes from a long of 847 tonnes

COMEX Managed Money Silver 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.