Precious metals continued their consolidation this week, with gold
drifting off $10 to $1195 as of last night, and silver by $0.42 to $15.85.
Intra-day trading ranges are relatively tight with buyers of physical metal
on the dips and sellers of paper contracts capping rises.
There is little doubt that the global economic outlook, with China's
economy slowing and earlier expectations for US growth trimmed back, is
affecting sentiment. An analyst's note from Morgan Stanley forecast lower
gold prices for the next two years, on the basis that negative bond rates
elsewhere will continue to drive flows into US credit, continuing dollar
strength.
There is an underlying argument that quantitative easing is not working, and
zero interest rates are not preventing deflation. That being the case, there
are many fund managers who are not only bullish on the US dollar in currency
markets, but they believe its purchasing power in terms of goods and services
is likely to increase. If this analysis is correct, then, it follows that
gold priced in dollars will continue to fall.
Whether or not this undermines the gold price in the short-term remains to be
seen, but empirical evidence tells a very different story. The situation in
Germany and Austria in 1919 was similar, in that massive monetary stimulation
failed to improve the economic outlook, and the overwhelming public opinion
was that prices would fall. In other words, the purchasing power of the mark
and crown respectively was expected to rise. As we know, the reverse was true
with both currencies collapsing entirely a few years later.
The fact that Germany and Austria were dealing with a post-war slump and the
conditions today are inherently financial does not invalidate the comparison.
When inflating the money supply fails to stimulate an economy, people will
logically believe deflationary forces are greater than inflationary forces,
when the likelihood of a currency collapse has actually increased. We appear
to be at this point in time.
The result is that on Comex the hedge funds have maintained above-average
short positions in gold, allowing the bullion banks to reduce theirs. In
silver Open Interest has rocketed up to all-time highs as shown in the chart
below.
It appears from Commitment of Traders* data that most of the increase in
Open Interest this year has been in spread positions by both swaps and
managed money categories. This indicates that poor underlying liquidity is
contributing to price differentials across different contract maturities.
Last week, the Shanghai Gold Exchange delivered 49.95 tonnes of gold into
public hands, an increase of 44.7% on the previous week.
Next Week
Monday
UK: CBI Industrial Trends.
Japan: Large retailers Sales, Retail Sales.
Tuesday
UK: Nationwide House Prices, BBA Mortgage Approvals, GDP (1st Est.), Index
of Services.
US: S&P Case-Shiller Home Price, Consumer Confidence.
Wednesday
Eurozone: M3 Money Supply, Business Climate Index, Consumer Sentiment,
Economic Sentiment.
UK: CBI Distributive Trades.
US: Core PCE Price Index, GDP Annualised (1st Est.), Pending Home Sales, FOMC
Fed Funds Rate.
Japan: Industrial Production.
Thursday
Japan: Consumer Orders, Housing Starts, CPI Core, Real Household Spending,
Unemployment.
Eurozone: Flash HICP, Unemployment.
US: Core PCE Price Index, Employment Cost Index, Initial Claims, Personal
Income, Personal Spending, Chicago PMI.
Friday
UK: BoE Mortgage Approvals, Net Consumer Credit, Secured Lending,
CIPS/Markit Manufacturing PMI, M4 Money Supply.
US: Manufacturing PMI, Construction Spending, ISM Manufacturing, Vehicle
Sales.
*The Commitments of Traders (COT) reports provide a breakdown of each
Tuesday's open interest for markets in which 20 or more traders hold
positions equal to or above the reporting levels established by the Commodity
Futures Trading Commission.
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