While gold consolidated its recent gains, silver was sold down this week
along with other metals and energy.
The whole commodity complex suffered badly in the stock-market fall-out,
before a sharp bear-squeeze across commodity markets pushed silver, copper
and oil sharply higher yesterday (Thursday). Silver is now down 6.8% on the
year and gold 5%. Prices were slightly firmer this morning in Asian trade,
before the European opening.
Storm-force winds blew through all markets, with substantial falls in
equities after last weekend. As it became clear that the falls would be
contained for the moment, the US dollar rallied and US Treasury yields
increased from the panic lows. This recovery in general sentiment led to
weakness in precious metals generally.
The sharp fall in silver is hard to justify in anything other than purely
speculative terms. While the last Commitment of Traders Report (18th August)
for the US futures market showed Managed Funds short positions were slightly
less extreme, they are still very high, as shown in our next chart.
We will get updated COT figures this evening, but it is reasonable to
suppose that some of the long positions in this category have been closed
with open interest falling about 7,000 contracts. There may have been some
producer hedging as well. The net position, longs minus shorts, is our next
chart.
The chart confirms speculators in the form of hedge funds were still
extremely bearish as a crowd mid-month and there is little evidence this
sentiment has changed this week.
Anecdotal reports are of significant shortages of physical gold and silver,
despite the negative sentiment in futures markets. Demand for coins and
retail bars in the US has cleaned out the dealers, particularly for silver,
and in London availability of sovereigns continues to be tight. Western
markets for gold in particular must be reflecting the strains imposed upon it
by continuing Asian demand, which has led to progressive destocking of
vaulted gold for the last three years.
The next chart shows how China's public demand for physical gold, the largest
identifiable physical market, has grown over recent years.
In the first seven months of 2015 1,464 tonnes were taken up by the
public, an annual rate of over 2,500 tonnes. If the average monthly growth
seen in the first half persists, total deliveries could be somewhat more.
World mine production according to the US Geological Survey in 2014 was only
2,860 tonnes, including China's own output of 450 tonnes, putting this one
market in context. Other Asian countries are also buyers, notably India which
is back in the market for an estimated 1,000 tonnes this year.
These two nations alone are taking out about 150-200 tonnes more than is
mined, and while there are also scrap supplies to consider, maybe about 500
tonnes globally, scarce bullion stocks in the west are still being depleted.
The public response throughout Asia to currency instability could be the most
important influence on the gold price in coming months. Traditionally, when
currencies come under stress the public reaction is to step up gold
purchases, in which case backwardations will persist and premiums in Asian
markets will rise.
I shall tweet the latest weekly demand figure for China later today when
available on @MacleodFinance.
Next week
Monday.
Japan: Capital Spending, Vehicle Sales, Construction Orders, Housing
Starts. Eurozone: Flash HICP. US: Chicago PMI.
Tuesday.
Eurozone: Manufacturing PMI, Unemployment. UK: BoE Mortgage Approvals, Net
Consumer Credit, Secured Lending, M4 Money Supply. US: Flash Manufacturing
PMI, Construction Spending, IBD Consumer Optimism, ISM Manufacturing, Vehicle
Sales.
Wednesday.
Eurozone: PPI. US: ADP Employment Survey, Non-Farm Productivity, Unit
Labour Costs, Factory Orders.
Thursday.
Eurozone: Composite PMI, Services PMI, ECB Deposit Rate. US: Initial
Claims, Trade Balance, ISM Non-Manufacturing.
Friday.
US: Non-farm Payrolls, Private Payrolls, Unemployment.
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