Welcome to a very brief overview of the recent performance in the markets. The essentials are captured in the table below and each week we will show a chart of interest.
Gold shake-out followed by recovery as the markets take a longer-term view
Last week we said that we thought the outcome of the election would be bullish for gold but that as we eventually started to return to normal in the belief that the virus was being brought under control, then “… the balance in the gold market will change again. As private consumers come back into the market then, for the same reasons (return of confidence), money managers are likely to be bailing out and it is possible to see a repeat of the patterns of 2013 when western investors were selling gold ETFs and all that gold went into the Far East, almost exclusively China”.
What we saw last Monday, with gold trading a near $115 range to fall from $1,965 to an intraday low of $1,861, was an illustration in microcosm of what could play out over a series of weeks when this sorry situation finally draws to a close, or as near as we can get to such a position. The announcement from Pfizer came during the Monday morning hours of European trading and the financial markets reacted accordingly, with tech stocks toppling and value stocks, especially in the oil and airline industries, rallying sharply. Much of this was of course a knee-jerk reaction, with market makers framing their books accordingly.
Since then the markets have settled as more measured reactions have taken over. Gold has worked its way back towards $1,900 and silver, which traded between $26.01 and $23.58 in the same day, has moved back to regain the $25 level.
Gold’s percentage fall on the day was 5.9%, while that of silver was 9.3%, which made sense given that silver volatility is inherently higher than that of gold. As a result of this higher volatility, however, silver’s rally over Election Day and the following day, at 11.9% was substantially stronger than that of gold, at 4.4%. The result of this was that when the metals prices recoiled on the Monday, gold dropped to a five-week low, while silver only fell to a five-day low. This was quickly reflected in the market reaction at the retail level, with gold coin demand surging in mid-week, while there was a smaller short-term reaction in the silver coin market.
We do not yet have the Commitment of Traders figures for the week to 10th November, as the United States marked Veterans’ Day last Wednesday, 11th November. When they are released they will be illuminating. Among the Exchange Traded Funds, last week saw daily average redemptions of 4.5tpd, for a net loss of 22.5t, with particularly heavy sales towards the end of the week. This may well have been top-slicing, or the taking of partial profits as some holders pre-empt the establishment of a large-scale vaccine programme. The losses in the month to date are 16t, for a net dollar outflow of $948M. Nonetheless, holdings are ~3,883t, equivalent to just over eleven months’ global mine production.
Silver ETFs, meanwhile, have seen some light redemptions in the past few days, but because the silver funds have a higher proportion of retail holders, they tend to be longer-lasting. When the gold funds shed 921t over the course of 2013 (which was 36% of total), silver lost just 458t or 3% of the total, which amply illustrates the point.
We estimate that this year the underlying silver market fundamentals are broadly in balance on a calendar year basis with 30,000 tonnes on either side and posting a deficit of just less than one week’s global fabrication demand. The silver ETFs, however, have absorbed just over 9,100t so far this year, which has helped to give silver its buoyancy (and of course which has been driven by contagion with gold) which equates to 16 weeks’ global silver industrial demand. One word of warning, though; there is a lot of silver coming out of the ground, not least as a by-product of other metals (approximately 70% of total mine supply), currently looking for a home so from a purely fundamental standpoint, silver’s upside price potential rests with gold.