Alternatively,
watching paint dry. That's how it has felt this week with gold's volatility
slowing to a crawl ahead of Thanksgiving yesterday and the Swiss gold
referendum on Monday.
However,
Open Interest1 on Comex2 , has suddenly collapsed for both gold and silver,
indicating something interesting is going on.
At the
same time, the gold forward rate in London (GOFO) has gone sharply negative
to -0.4% as shown in the next chart, from the LBMA.
The
chart covers the year so far, and it can be seen how the rate has fallen deep
into negative territory over the last six weeks. It is now in the largest
backwardation3 seen since 9th March 2001 when a sudden bullion shortage
appeared to be rapidly resolved, presumably from the Bank of England's vaults
(Britain was reducing her gold stock at that time). Before that in September
1999 GOFO had hit record negative territory, after which gold shot up by 20%
in a week. In both these previous cases GOFO rates spiked deep into
backwardation which was quickly reversed. Today there does not appear to be
the liquidity from central banks or anywhere else to resolve the bullion
shortage, so goodness knows how it will be resolved this time.
So how does this tie in with the collapse in open interest on Comex? We will
have a better idea when we see the Commitment of Traders (COT)report later
tonight, but subject to what the COT report reveals, it is most likely to be
spread positions being closed, which could have become loss-making due to the
unexpected surge in backwardation in the physical market. On 18th November,
total spread contracts in gold were 104,445 contracts and in silver 40,580
contracts, which would fit this explanation. Furthermore, the effect on the
market has been broadly neutral, which would not have been the case had naked
bull or bear positions been liquidated.
Backwardations have been a feature of the physical gold market from time to
time this year as the GOFO chart shows, but they have not been as persistent
or extreme as they are today. If central banks have withdrawn as liquidity
providers, we could be seeing early warning signs of more serious problems
developing in the market which would be more difficult to resolve than in the
past.
Meanwhile prices traded most of the week around the $1190-1200 level ahead of
next Monday's Swiss referendum on gold, though the gold price dipped below
this level yesterday afternoon and overnight on a sharp fall in oil prices in
the wake of an OPEC meeting.
In other news Holland repatriated 122.5 tonnes of her gold from New York in a
move that seems likely to upset Germany, which had booked its position at the
head of the queue for gold from the Federal Reserve Bank of New York. And
China's public took a further 52.48 tonnes last week, so no wonder GOFO rates
are in such serious backwardation.
Next
week
Monday.
Japan:
Vehicle Sales.
UK: Halifax House Price Index, BoE Mortgage Approvals, Secured Lending,
Markit Manufacturing PMI, M4 Money Supply.
Eurozone: Manufacturing PMI.
US: Manufacturing PMI, ISM Manufacturing
Tuesday.
Eurozone:
PPI.
US: Construction Spending, Vehicle Sales.
Wednesday.
Eurozone:
Composite PMI, Services PMI, GDP (2nd Est.), Retail Trade.
US: ADP Employment Survey, Non-Farm Productivity, Unit Labour Costs, ISM
Non-Manufacturing Index.
Thursday.
UK: BoE
MPC Base Rate,
Eurozone: ECB Deposit Rate.
US: Initial Claims.
Friday.
Japan:
Leading Indicator.
US: Non-Farm Payrolls, Trade Balance, Unemployment, Factory Orders, Consumer
Credit.
1 Open
interest (also known as open contracts or open commitments) refers to the
total number of derivative
contracts, like futures and options,
that have not been settled in the immediately previous time period for a
specific underlying
security. A large open interest indicates more activity and liquidity for the
contract.[1]
2 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.
3
Normal backwardation, also sometimes called backwardation, is the market condition
wherein the price of a forward or futures
contract is trading below the expected spot price
at contract maturity.[1]
