It
turns out the Swiss referendum last weekend which sought to force the Swiss
National Bank to maintain 20% gold reserves was a red herring so far as
precious metal markets are concerned.
It was
fairly obvious before the referendum that no sensible trader would had bought
gold in the expectation it would go through, so there would be few short-term
sellers afterwards. Equally, it was so obvious to traders the referendum
would fail that there may have been some short-sellers, or perhaps deferred
buying waiting for the event to pass.
In
early Far East trade on Monday the big players took the opportunity to test
this by knocking the price to as low as $1142 immediately after the result
was declared. This should have taken out all the stops on the way down.
Instead it set up precious metals for the sharpest rally seen in years. Gold
rose as much as $80 or 7% from that low during Monday’s trading, and silver a
remarkable $2.57, or 18%.
The
extreme level of short positions held by money managers (mostly hedge funds)
on Comex had already reduced slightly, according to the Commitment of Traders
Report for the previous Tuesday (25th November). Furthermore, as
well as swaps the spectacular reduction in open interest reflects contracts
exchanged for physical[i] (EFP). In this context EFP includes deals for
forward settlement and no physical needs to be involved, so EFP represents
contracts that have simply moved from the regulated Comex[ii] market into the
unregulated hinterland.
The
following charts for gold and silver respectively show how dramatic the
decline in open interest has been.
As gold
recovers, the backwardation in London, represented by the GOFO[iii] rate, has
ameliorated to minus 0.17% yesterday, having been minus 0.5825% on Monday,
and this is shown in the next chart from the LBMA[iv].
This
does not necessarily mean the shortage of physical bullion has been resolved,
only that at over $1200, buyers of physical are not chasing prices so hard.
This is confirmed by market action with the $1200 level initially acting as a
level of supply until Wednesday morning UK time, after which it has become
support with the price holding above it. It is also worth noting that the
turmoil in markets was a wider phenomenon with the oil price recovering
sharply on Monday as Brent rallied from $68 to$73, before drifting off back
to $69 yesterday.
In
other news, according to a report from Bloomberg, China is considering
allowing entities other than licensed banks to import gold, to eliminate the
premium in Shanghai over the London spot price. It is more likely that this
move would be intended to gain a greater share of global gold flows to
satisfy domestic demand. And last week the SGE[v] delivered a further 53.56
tonnes into public hands, a rate which has been constant for the last ten
weeks and is more than global mine production ex-China.
Next
week
Monday.
Japan:
Economy Watchers Survey, M2 Money Supply.
Eurozone: Sentix Indicator.
UK: CBI Industrial Trends.
Tuesday.
UK:
Industrial Production, Manufacturing Production.
US: IBD Consumer Optimism
Wednesday.
Japan:
Consumer Confidence.
UK: Trade Balance.
US: Budget Deficit.
Thursday.
Japan:
Key Machinery Orders.
US: Import Prices, Initial Claims, Retail Sales, Business Inventories
Friday.
Japan:
Capacity Utilisation, Industrial Production.
UK: Construction Output.
Eurozone: Industrial Production.
US: PPI, University of Michigan Sentiment.
[i]In
Finance, an Exchange of Futures for Physicals (EFP) is a transaction between
two parties in which a Futures contract on a commodity is exchanged for the
actual physical good. This transaction involves a privately negotiated
exchange of a futures position for a corresponding position in the underlying
physical.
[ii]Comex
US futures market for trading futures and options on futures in a wide range
of commodities, currencies and stock indicies including gold, silver,
platinum and palladium.
[iii]The
gold forward rate (GOFO)
[iv]The
London Bullion Market Association
[v]The
Shanghai Gold Exchange