A roller-coaster week for Gold and Silver

Gold was on a roller-coaster last week and has shed over $100 or 5.5% over eight trading days. Silver has lost just over $2 or 9%, and the Friday fall was precipitous. The long Chinese holiday and the implosion of the Shanghai premium were a partial trigger for the late falls last week, but the main influence was a surge in bond yields midweek. Support has developed at the start of this week, but potential professional buyers stood well back last week. Global bond markets finally turn tail and intensify pressure on gold; gold is potentially ripe for a short-covering rally, but with China closed and the bond markets firmly on the defensive now, this may take time to develop.

We start the final quarter of the year with gold and silver licking their wounds after a hefty wash-out, and caution looks likely to be the watchword for now.

 Market review

At the start of last week, gold was still trading in the $1,900-$1,950 range that had been in place since late August, holding around $1,920; as we write now, it is trading between $1,830 and $1,840.  More disappointing economic numbers from the United States early in the week (weakening housing market and poor consumer confidence numbers) put bond yields under pressure early on, but whereas this would normally support gold prices, this time it worked the other way round as the markets continued to fret about a possible rate rise in either the November or December meeting of the Federal Open Market Committee (FOMC); these are on Oct 31/Nov 1 and Dec 12/13. 

Then yields surged as the bond markets, after months of being more benign than the FOMC (or the European Central Bank, for that matter), changed course as the “higher-for-longer” message finally hit home.  The US ten-year yield, which has been maintaining a strong negative correlation with gold over recent months, reached its highest level since July 2007, and the ECB Generic ten-year yield is at its highest since July 2011.

US Real and nominal ten-year yield, 1970 onwards

Source: Bloomberg, StoneX

EU Real and nominal ten-year yield, 1970 onwards

Source: Bloomberg, StoneX

Exchange-traded products

Exchange-traded products became both price takers and price makers last week.  The gold and silver products have been under light pressure for some months. Still, the selling of gold accelerated sharply in the middle of last week, with 17 tonnes of redemptions last Tuesday, as gold eased from $1,920 to $1,900; the release of those numbers overnight may well have hit market sentiment as Wednesday was the first day of sharp falls, with spot declining to $1,875. 

Over September as a whole, the gold funds shed 55 tonnes for a year-to-date contraction of 187 tonnes or 5% of year-end 2022 and, compared with a nine-month drop of just 20 tonnes in January-September 2022.  The dollar outflow over the month was $3.4Bn.

Gold and the weighted dollar index

Source: Bloomberg, StoneX

The silver funds were more varied, with pockets of buying appearing towards month-end and a net loss over the month of 53t and year-to-date 1,086 tonnes, equivalent to 5% of year-end levels.  At end-month, holdings stood at 22,210 tonnes, equivalent to ten months’ world mine supply.

The next sharp fall came on Friday during COMEX hours.  The inflation numbers were relatively constrained; the Core PCE (Personal Consumption Expenditure) rose by less than expectations in the month-on-month (0.2%) segment, but the year-on-year change, at 3.7%, while still well above target, was 30 points lower than in August.  What may have caught FOMC members' attention was the one-year expectation for inflation (University of Michigan Survey) at 3.2% and 2.5% for five years.  Meanwhile, personal spending was up by just 0.1% while personal income was up 0.4%; the simple implication from this is that the Fed’s restrictive policy is continuing to bite.

Earlier in the day, the Shanghai premium, which had reached $125 a week previously on the back of reasonable demand and restricted supply, collapsed to $20, and it looks as if some quotas for imports may have been released.  This will almost certainly have affected international prices as loco London came under pressure soon afterward.  China is now on the Golden Week holiday, which is usually one of the strongest periods of the year for gold demand, but the very high local prices are likely to keep things quieter this time.

COMEX

On COMEX in the week to last Tuesday, during which gold opened at $1,934, rallied slightly, and then dropped to $1,916, gold was friendless, with Money Managers trimming long positions by 20 tonnes (5%) and expanding shorts by 45 tonnes or 24%  to 284 tonnes.  This is 100 tonnes more than the twelve-month average and theoretically sets gold up for a short-covering rally, but the market will need more bargain hunting to appear yet.

Over the same period, silver opened at $23.30, rallying to approach $24 by the 22^nd but was down to $23 again by the 25^th. The outright short positions in silver contracted again, and there was a very small increase in the longs, taking the net position up to 847 tonnes against a twelve-month average of 1,676 tonnes.

Gold COMEX positioning, Money Managers (tonnes)

Source: CFTC, StoneX

COMEX Managed Money Silver Positioning (tonnes)

Source: CFTC, StoneX

Taken from analysis by Rhona O’Connell, Head of Commodity Market Analysis for EMEA & Asia, StoneX Financial Ltd.

Contact: Rhona.Oconnell@stonex.com.