This week the US dollar moved strongly upwards against the other major
currencies, at the same time weakening gold and silver along with most
industrial commodities, before some profit-taking set in yesterday.
The effect on precious metals is a change from previous weeks when a
flight into dollars also supported gold and silver prices. Instead, gold and
silver were noticeably weak until this morning, when prices recovered $8 and
$0.13c respectively in early London trading. So what’s changed?
On examination very little has, other than a determination by liquidity
providers in the futures markets to contain their short positions. In a
market where speculators have little or no ability to judge value, emotion
sets prices. This makes it easy for bullion banks with deep pockets to move
the market and change sentiment. On Comexi this has led to a sharp reduction
in outstanding gold open interest over the last fortnight as shown in the
chart below.
The chart clearly shows the tight relationship between open interest and
the gold price since late-December and suggests that on purely technical
grounds there is still some limited scope for lower prices. Interestingly
attempts to shake out bulls in silver have been less successful, as
illustrated in the next chart.
Moment to moment silver trading imparts the impression that the market is
systemically short, and there have been many occasions when gold has drifted
lower that the silver price has gained on balance.
Meanwhile Greece continues to dominate financial headlines, with deposits
being withdrawn from the banks, so much so that the ECBii has had to extend
its Emergency Liquidity Assistance by an extra €5bn to €64.5bn. The European
Financial Stability Facility for Greece expires at the end of this month, and
in March a series of IMFiii loans and T-bills mature. The pressure for Greece
to compromise is building rapidly.
At the same time banks in central Europe have been adversely affected by
potential losses on Swiss franc mortgage exposure and sanctions against
Russia. The combination of these troubles plus Greece has not so far
supported the gold price, though there are reports that Greek citizens are
buying British sovereigns. There are also reports from Switzerland that
negative interest rates are similarly creating demand for physical bullion.
For the moment gold traders are ignoring the potential demand for precious
metals from negative interest rates. Sweden’s Riksbank has cut its repo rate
to -0.1%, and the Bank of England warned that prices might actually fall,
signalling the possibility that it might have to take more easing action to
prevent deflation. The trend towards negative interest rates continues which
should underwrite precious metals.
Next week
Monday
Japan: Capacity Utilisation, Industrial Production (final).
UK: Rightmove House Price Index.
Tuesday
UK: CPI, Input Prices, ONS House Prices, Output Prices.
Eurozone: ZEW economic Sentiment.
US: Empire State Survey, NAHB Builders Survey, Net Long-Term TICS Flows.
Wednesday
UK: Average Earnings, BoE MPC Minutes, Claimant Count Change, ILO
Unemployment Rate.
US: Building Permits, Housing Starts, PPI, Capacity Utilisation, Industrial
production.
Japan: Customs Cleared Trade, BoJ MPC overnight Rate.
Thursday
Japan: All Industry Activity Index, Leading Indicator.
Eurozone: Current Account.
UK: CBI Industrial Trends.
US: Initial Claims, Leading Indicator, Philadelphia Fed Survey.
Friday
Eurozone: Flash Composite PMI, Flash Manufacturing PMI, Flash Services
PMI.
UK: Public Borrowing, Retail Sales.
US: Flash Manufacturing PMI.
i COMEX, (Commodity Exchange, Inc.) a division of the New York Mercantile
Exchange (NYMEX)
ii ECB, European Central Bank
iii IMF, International Monetary Fund
