StoneX Bullion Report

Gold's defensive character

Gold began to develop a defensive character in late July, and while markets remain uncertain, this continued, with gold at time of writing at $1,969 and silver at $23.2 per ounce. Gold edged higher at the start of last week, amid continued uncertainty over the US economic outlook, but technical resistance for gold around $1,970 contained gains. 

Subsequently, US economic data were as expected or slightly better. By midweek, gold had dropped below $1,940, ironically, following Fitch Ratings Agency’s downgrade of the US credit rating. While this news provided support for, the response of the gold price was anaemic, and we subsequently saw some liquidation of positions.

Long positions reduced

Speculative professional investors, and retail investors have both reduced gold and silver positions in recent months. Net long positions in gold and silver held by professional traders are being reduced, according to data released by COMEX (Commodity Futures Trading Commission Commodity Exchange), the primary futures and options market for trading metals. ETF creation has also diminished, highlighting less investment demand for gold and silver.

We expect the bullion market to remain on the back foot, although there is some support at these levels, and that may well lead to a further period of price consolidation.

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Fitch downgrade

Fitch said that its downgrade of US debt, from AAA to AA+, reflected expectations of fiscal deterioration over the next three years: “a worsening in the Government balance that reaches at least 2% of GDP in one year”; a “high and growing general government debt burden”; and debt-ceiling avoidance as we have discussed before.

Fitch gave the US government a rap over the knuckles, and others, and this could be seen as a shot across the bows ahead of the next debt-ceiling negotiations, after the next election, in late 2024, early 2025. Fitch forecast a general government deficit for the US to hit 6.3% of GDP this year, after 3.7% in 2022, reflecting cyclically weaker federal revenues, new spending plans and a higher interest rate burden.

Gold technical and dollar relationship, ten-day view

Source: Bloomberg, StoneX

The Fed needs to continue to walk a difficult path and, reading between the lines, this might be supportive for those Fed governors arguing for a softer line in respect of interest rate policy. Nonfarm Payroll numbers published at the end of the week suggested a softening in the labour market, although average earnings edged higher.  So, in theory, this was supportive for the gold price. However, the immediate direction is hard to forecast ahead of mid-September’s Fed meeting and the economic data that will dictate its next move.

Gold/silver ratio

The ratio of gold to silver prices has widened as gold prices declined.  This is normal given silver’s generally higher volatility than gold.  Gold’s 1% fall last week was accompanied by a 6% drop in silver.  Ordinarily, we should expect silver’s drop to be between 2.0%-2.5%, but silver fell harder as weak economic data from China and Europe impacted the industrial demand for the metal.

Gold, silver and the ratio, short-term

Source: Bloomberg, StoneX

Physical Investment

From the professional speculative and investment perspectives, gold and silver ETF investors are still shunning gold. 

ETFs

ETF fund creation has been much reduced:

• Since the start of June there have been just five out of 47 trading days of gold fund creation, for a net loss of 101 tonnes to 3,373 tonnes, a 3% drop in the year-to-date. (For comparison, annual world mine production is circa 3,700 tonnes.)
• Silver ETF activity is less extreme, with just fifteen out of 47 trading days of fund creation, for a net loss of 675 tonnes to 22,621 tonnes, also a 3% drop in the year-to-date.

COMEX

Money Managers on COMEX meaningfully reduced gold and silver long positions, as at Tuesday 1^st August:

• Net long gold positions from 296 to 249 tonnes, a 16% reduction
• This compares with a twelve-month average of 147 tonnes
• Longs were reduced by 27 tonnes and shorts were increased by 20 tonnes.
• Net long silver positions from 3,151 to 2,035 tonnes, a 35% reduction
• This compares with a twelve-month average of 1,260 tonnes
• Longs were reduced by 571 tonnes and shorts were increased by 545 tonnes

Silver: longs shorts and net positioning on COMEX (tonnes)

Source: Bloomberg, StoneX

Taken from analysis by Rhona O’Connell, Head of Commodity Market Analysis for EMEA & Asia, StoneX Financial Ltd. Contact: Rhona.Oconnell@stonex.com.