After slithering lower for much of the first half of May, with gold briefly dipping below $1,800 to touch $1,787 las Monday 16th (silver’s intraday low was the previous Friday, at $20.46), both metals recouped much of their losses over the source of last week. As we write, gold is trading above $1,860 and is close to the Fibonacci retracement target of 61.8% when compared with the high of $1,920 at the end of April. Working from the same dates, silver has recovered to more than $22.10, after a low of $20.45 in mid-month, so it has unwound more than half its losses but is some way away from the 61.8% retracement level. The ratio has also contracted and is now testing 84, having been as high as 88 in mid-May. Little has changed from a macro-economic standpoint although the dollar has been under some pressure (see below) and equities are also looking fragile in the face of a challenging economic backdrop, while there was at long last been some fresh interest in gold ETPs.
Gold and the S&P:Gold ratio
There has certainly been some bargain hunting in both metals and will the retreat in the dollar is clearly an influence, prices for both metals have also picked up in other currency terms. The reversal in the dollar was partly stimulated by a jump in the euro as European Central Bank members said during the week that the Bank could raise rates as early as July, as its quantitative easing programme draws to a close. The President of the Bank, Christine Lagarde, posted a blog stating that she expected European rates to be back in positive territory by the end of September. In her post she noted that the Pandemic Emergency Purchase Programme (PEPP) has been successfully completed and that net purchases under the Asset Purchase Programme (APP) should close early in the third quarter, paving the way for interest rate lift-off in July “in line with our forward guidance” and that “Based on the current outlook, we are likely to be in a position to exit negative interest rates by the end of the third quarter”.
Noting the plethora of supply shocks that have been hitting the global economy and the resultant inflationary forces (and slowing growth) she argues that policy normalisation has to be carefully calibrated to the prevailing conditions; she continues to target 2% inflation over the medium term and the Bank will take whatever steps are necessary to achieve that. European headline inflation is most recently reported at 8.1%; excluding energy, food, alcohol, and tobacco the number contracts to 4.1%. So it will be interesting to see how aggressive the ECB will be in the interest rate adjustments. If we interpolate back to April 2019, the annual average inflation rate over the period works out at 3.0% pa.
Meanwhile in the United States the weekly jobless claims reached a four-month high last week, although this may to some extent reflect relatively benign numbers in the previous two weeks. The latest JOLTS number (job vacancies), however, continue to rise and are almost twice the number of registered unemployed so the labour market remains tight, and this is likely to keep inflationary forces underpinned. The June meeting of the Federal Open Market Committee (14th and 15th) is one of the “dot plot” meetings with the Committee’s economic projections. Aggressive rises in the Committee’s expectations for the fed funds target level at year-end 2022 and 2023 would quite possibly take same of the gloss off gold and sliver’s recent moves, but for now the overall inflationary environment has been taking the headlines. This week sees the release of the Minutes from the previous meeting, which are always worth reviewing for changes of nuance.
The Commitment of Traders numbers for 17th May showed that gold’s outright Managed Money longs at just 360t, the lowest since mid-February, while the outright shorts were 225t, the highest since October 2021, to give a net long of just 135t, the lowest since early October 2021 and compared with a twelve-month average of 270t. Clearly there has been some short covering since. Silver had already started to turn around, with small fresh interest from the long side, although shorts also continued to increase; some of that will have been reversed since then.
At the retail level gold demand is strong across the Middle East and Asia and this is helping to give the market some support. Coin demand, especially for silver remains very healthy in the United States.