This week started with a sharp bear squeeze, which took gold from $1178
to $1214, and silver from $15.70 to $16.71.
These higher prices on Wednesday proved to be the peak for both metals,
before they fell back sharply yesterday (Thursday) on better than expected US
initial jobless claims. The Federal Open Market Committee's (FOMC) minutes,
which admitted the US economy is softening, had little effect when released
yesterday.
We can be fairly sure the rise in the gold price on Monday and Tuesday was
due to bears being squeezed, because Open Interest on Comex fell some 18,000
contracts, with the biggest drop on Monday when the market was at its
strongest. If instead Open Interest had increased on rising prices it would
have signalled that buyers are opening new positions; but this was clearly
not the case, and the next chart illustrates this very clearly.
The market-makers on Comex would have been fully aware that there were
weak hands short of gold contracts and susceptible to being squeezed.
Equally, having successfully sold these nervous bears some expensive
contracts on this squeeze the market makers had every incentive to mark
prices down subsequently, so that they can book profits and show a favourable
price (to them) on a mark-to-market basis at the month end. And this is
precisely what happened.
The pattern in silver differed slightly, because this less liquid market
has a larger element of bulls and bears taking more entrenched positions, but
the same pattern can be seen.
In silver's case Open Interest had run up to record highs before last week
while the price was falling. Buyers (mostly commercial users of the metal)
were obviously taking the opportunity of lower prices to add to their
positions. If you are buying for commercial reasons you are a more solid
player than the hedge funds evident in the gold market.
However, the Commitment of Traders Report disclosed that the hedge funds'
short positions in silver had increased by nearly 15,000 contracts (75
million ounces) last month, presumably on the basis that this was a geared
play on shorting gold. So it was those weak hands that were squeezed into
closing their positions this week, with the serious buyers stepping back.
This action appeared to be at odds with the sudden unwinding of long US
dollar positions, leading to the dollar falling significantly. The weakening
dollar was actually consistent with a subdued statement from the FOMC, the
conclusion from which must be that interest rate rises are to be delayed
further, possibly until next year. The long-term inflationary effect and the
benefit to precious metals prices are being ignored for the moment.
Given that the highly technical nature of trading this week is now coming
to an end with the commencement of a new month, there is reason to hope that
the futures markets for gold and silver might respond more to fundamental factors,
including growing political uncertainties in Europe, over the coming weeks.
Next week
Monday
Eurozone: Manufacturing PMI, Sentix Indicator. US: Factory Orders
Tuesday
UK: Halifax House Price Index, CIPS/Markit Construction PMI. Eurozone:
PPI. US: Trade Balance, IBD Consumer Optimism, ISM Non-Manufacturing
Wednesday
Eurozone: Composite PMI, Services PMI, Retail Trade. UK: CIPS/Markit
Services PMI. US: ADP Employment Survey, Non-Farm Productivity, Unit Labour
Costs
Thursday
US: Initial Claims, Consumer Credit
Friday
UK: Trade Balance. US: Non-farm Payrolls, Private Payrolls, Unemployment,
Wholesale Inventories
Disclaimer: The views and opinions expressed
in the article are those of the author and do not necessarily reflect those
of GoldMoney, unless expressly stated. Please note that neither GoldMoney nor
any of its representatives provide financial, legal, tax, investment or other
advice. Such advice should be sought form an independent regulated person or
body who is suitably qualified to do so. Any information provided in this
article is provided solely as general market commentary and does not
constitute advice. GoldMoney will not accept liability for any loss or damage,
which may arise directly or indirectly from your use of or reliance on such
information.
