After a very strong rise last Friday precious metals drifted
lower-to-sideways for most of the week, but behind this unexceptional
behaviour there are some tectonic shifts under way.
The chart below is of the gold price and open interest on Comex.
When the price rose on Friday open interest increased by 16,366 contracts, an
enormous rise, and volume was exceptionally heavy as well. Events such as
this often mark a turning-point in markets, and open interest has continued
to grow, especially on Wednesday when a further 12,852 contracts were added.
Furthermore, the gold forward rate in London between spot and one month has
gone sharply negative, indicating a severe physical shortage.
Last Friday's exceptional action was noted by technical analysts, so much so
that the Bank of America's MacNeil Curry, their chief technical analyst,
instantly called it a major bottom. Since chartists all follow similar
methods it is very likely that the record number of shorts harbour serious
doubts.
The next chart is silver.
There's no doubt that the action is in gold rather than silver, and while
volume was good on Friday when gold had its sharp rise, silver was noticeably
muted until open interest rose strongly on Wednesday. If silver is to recover
from here, it looks like it will be led by gold. In both cases however, the
jump in open interest tells us it is new buying and not bear-closing driving
the market, which is positive.
I referred to tectonic shifts in my opening paragraph. This week combined
regulatory fines inflicted on five major banks totalled $4.3bn, which
according to the Financial Times takes total bank fines in 2014 to a
staggering $56.5bn. The latest settlement was in respect of foreign exchange
fixes only; but earlier in the week the FT ran a story that one of the banks,
UBS, is to settle allegations of misconduct at its precious metals trading
business at the same time. However, in the FCA's notice there was no mention
of precious metals, so that is presumably to come. So is the result of the
German bank regulator's (Bafin) investigation into Deutsche Bank's precious
metals dealings.
Dealers in the major banks are now reluctant to talk to almost anyone in
other firms in case innocent remarks are misconstrued. The result is that
dealing collusion has become more or less impossible, so it is reasonable to
assume that control over gold and silver prices by the big players acting in
concert will be significantly reduced in future. This is important, because
it appears to rule out some of the actions routinely used in the past – April
2013 springs to mind – when severe shortages of physical metal threatened to
drive the price considerably higher.
In short, continuing regulatory investigations are likely to extend to
announcements involving precious metals, and dealers are now so jumpy we can
effectively rule out future collusion. We will probably look back on these
developments and conclude that they have fundamentally altered the character
and behaviour of the market. And our starting point, indicated by a
near-record negative Gold Forward Offered Rate (GOFO) rate, is an acute
shortage of physical stock.
Late news: Yesterday the World Gold Council announced that central banks
bought 93 tonnes of gold in Q3, led by Russia with 55 tonnes. Late late news:
Shanghai Gold Exchange deliveries last week were up 20% to 54.2 tonnes.
Next week
Monday.
Eurozone: Trade Balance.
US: Empire State Survey, Capacity Utilisation, Industrial Production.
Tuesday.
UK: CPI, Input Prices, ONS House Prices, Output Prices.
Eurozone: ZEW Economic Sentiment.
US: PPI, NAHB Builders Survey, Net Long-Term TICS Flows.
Japan: BoJ Monetary Policy Meeting.
Wednesday.
Japan: All Industry Activity Index, Leading Indicator (Final), Customs
Cleared Trade.
Eurozone: Current Account.
US: Building Permits, Housing Starts.
Thursday.
Eurozone: Flash Composite PMI, Flash manufacturing PMI, Flash Services
PMI.
UK: Retail Sales, CBI Industrial Trends.
US: CPI, Initial Claims, Flash manufacturing PMI, Existing Home Sales, Leading
Indicator, Philadelphia Fed Survey.
Friday.
No material announcements.