This week precious metals continued to consolidate January's gains in
volatile financial markets, with both gold and silver range-bound. Platinum
and palladium are up on the week, noticeably stronger than gold and silver.
Physical and paper markets appear to have been behaving differently, with
prices tending to be firm in London (where physical deliveries take place)
and weaker in New York (which is overwhelmingly derivative trading), though
at the close of trading in New York prices appeared more often than not to
steady ahead of the Asian markets opening.
The US dollar has also been consolidating its recent strength, roughly in
phase with the gold price. The logical conclusion from this action is that
for the moment, sellers of the other paper currencies are hedging into both
gold and the US dollar, which from the point of view of a non-US person faced
with a weakening currency makes sense. So long as this relationship persists,
it should also give us a clue on the timing of gold's next move, which will be
when the overbought position in the dollar is unwound enough to support its
next rise. We may already be there after yesterday's pronounced dollar
weakness, which was technical in nature with the euro strengthening sharply
despite a deteriorating Greek situation.
On Comex precious metal traders and bullion banks have been fighting a
paper battle, and traders' positions have now normalised, as shown in the
chart below, which is of the short positions of the Managed Money category in
gold:
The dotted line is the long-term average short position, which after the
extreme volatility of the last two years is where we are today. This return
to normality has resulted in the largest four traders (basically the bullion
banks) increasing their net short position, which is shown in the next chart.
This is still well above the average since 2006, but with physical
liquidity low, the bullion banks are unlikely to be able to tolerate escalating
shorts to the extent they have in the past, so they might be forced to
capitulate if buying increases much more. Until that moment we should expect
them to make every attempt to shake out long positions by triggering
stop-loss positions.
It will be important to watch big macro events, such as the possible
fragmentation of the Eurozone, a run on Greek banks, particularly if it
threatens to destabilise the euro or other Eurozone banks, as well as the
developing crisis in Ukraine.
Tensions over Ukraine have rapidly escalated this week, and might become a
factor for gold and silver prices next week if America sends military
equipment, Russian tanks start rolling, or both. We must hope the
Merkel/Hollande peace initiative defuses the situation.
Next week
Monday
Japan: Consumer Confidence, Economy Watcher's Survey.
Eurozone: Sentix Indicator
Tuesday
Japan: M2 Money Supply, METI Tertiary Activity Index.
UK: Industrial Production, Manufacturing Production, NIESR GDP Est.,
US: Wholesale Inventories.
Wednesday
US: Budget Deficit.
Japan: Key Machinery Orders.
Thursday
Eurozone: Industrial Production.
UK: BoE Quarterly Inflation Report.
US: Initial Claims, Retail Sales, Business Inventories.
Friday
UK: Construction Output.
Eurozone: GDP, Trade Balance.
US: Import Price Index
