Gold and silver remain close to their lows for the year, discouraged as
usual by dollar resilience.
Precious metals appear to be in limbo: speculative buyers are discouraged
above all by their disappointing performance during the Greek crisis, and the
possibility that a Chinese stock market crash might lead to forced selling of
gold by Chinese speculators. So far, the latter concern has proved unfounded
with public demand in China accelerating on lower prices and exceeding global
mine output on its own. As well as Chinese demand, anecdotal evidence tells
us that at these prices physical demand from the public has increased
elsewhere, with gold sovereigns becoming scarce in London. And our dealers
yesterday reported buyers outweighing sellers this week.
Desultory trading has led to a large fall in open contracts in gold futures
on Comex, with the August contract running off the board instead of being
rolled forward. This is shown in the next chart, and we can assume that this
will have relieved the oversold condition somewhat.
The gold price bottomed last Friday at $1,079, and after rallying from
that level to a high of $1,104 was sold down yesterday morning to a low of
$1,083, which is the same price in early European trading this morning. Silver
fared better, outperforming gold, and in this case open interest has held up,
the nearest active contract being September. This is our third chart.
On Wednesday the Federal Open Market Committee published their latest
minutes, which were virtually unchanged from the previous ones. According to
Fed-watchers, the odds probably favour a December rate hike over September,
assuming no other factors come into play.
The Fed has so far dismissed suggestions that external factors will affect
its timing, such as a collapsing Chinese stock market and a weakening euro
driven by a rapidly disintegrating Greek economy. But it is hard to envisage
a Fed that simply ignores these important developments, when a higher Fed
funds rate would increase global asset and currency instability.
For now, this is a topic of uncertainty, coming towards a crunch-point. Both
these problems are likely to strengthen the dollar, particularly against the
euro, which looks likely to weaken to under dollar parity. Until this issue
is resolved, gold faces selling pressure in futures markets.
This analysis describes what looks like a developing crisis. On one side are
the markets, which are awash with fiat currency beginning to be driven by
fear; on the other is the Fed, seemingly powerless to act conventionally with
interest rates at the zero bound. For patient holders of gold it can only be
a matter of a month or two before something breaks, but until it does it
could continue to be a rough ride.
I shall tweet Chinese demand for last week when the information becomes
available today on @MacleodFinance.
Next week
Monday
Eurozone: Manufacturing PMI.
UK: IPS/Markit Manufacturing PMI.
US: Core PCE Price Index, Personal Income, Personal Spending, Manufacturing
PMI Construction Spending, ISM Manufacturing.
Tuesday
UK: Nationwide House Prices.
Eurozone: PPI.
US: Factory Orders, IBD Consumer Optimism
Wednesday
Eurozone: Composite PMI, Services PMI, Retail Trade.
UK: Halifax House Price Index.
US: ADP Employment Survey, Trade Balance, ISM Non-Manufacturing.
Thursday
Japan: Leading Indicator (Prelim.).
UK: Industrial Production, Manufacturing Production, BoE Base Rate.
US: Initial Claims.
Friday
UK: Trade Balance.
US: Non-Farm Payrolls, Unemployment, Consumer Credit.
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