StoneX Bullion round-up Monday 25th July 2022

• Gold COMEX net short (Managed Money) expanded in the week to 19th July
• Indian silver market is currently stronger than that of gold

These markets are distinctly jittery ahead of the FOMC meeting this week (Tuesday/Wednesday26/27th), particularly as some of the latest US economic numbers give some support to the doves. Last week saw gold and silver drift lower initially as markets continued to fret about monetary tightening and the 50-basis point hike from the European Central Bank, while widely expected, still triggered another sell-off in gold and silver, with gold dipping towards $1,680 and moving into heavily oversold territory. The ECB’s nominal rates are now all positive (apart from the Deposit Facility, which is 0%), which grabbed some headlines, but in real terms they are well and truly in the red with the two-year yield at minus 8%.

The weak ZEW confidence index from Germany, the first major European Survey to be released in July, dampened sentiment with Investors’ expectations coming in at minus 53.8, the lowest since 2011, when the EU was struggling with a debt crisis (and which was the most recent time that the ECB previously hiked rates). The Bank also unveiled a new management tool, the Transmission Protection Instrument, which the Bank said, “can be activated to counter unwarranted, disorderly market dynamics”. The Tool would include bond purchases provided the applicant country meets certain criteria, including fiscal sustainability and sound and sustainable macroeconomic policies. There is a call also for application to be considered not just by the Bank, but also by the European Commission and/or the European Stability Mechanism.

EU two-year nominal and real rates

The ECB followed the Fed’s path by front-loading with a large rate hike, but it has also dropped its forward guidance, arguing that the large rate hike now means that the Bank can approach policy on a meeting-by-meeting basis.

Meanwhile on the other side of the Atlantic the housing market is slowing sharply, and this is a key component in the headline CPI, with “shelter” (housing and rent) comprising 32% of the total, and also 18% of the PCE total. New home construction fell in June to the lowest since the previous September, while applications for building permits were also at a nine-month low. This can to a large extent be traced to higher mortgage rates with the result that prices are starting to fall while inventories – which, to be fair, had been very low - are now on the increase, and stood at 1.26M at end-June.

The real move in the gold price came on Thursday; after falling in the wake of the ECB rate hike, it rebounded very sharply on the release of the U.S. Purchasing Managers Index (PMI) number. The Manufacturing number was relatively robust at 53.3, which, although below expectations was still positive (50 is neutral), but the Services index was 47.0, thwarting the market call of 53. Gold rebounded immediately, wiping out the losses of the morning and regaining $1,720, and has worked gradually higher since. Potentially encouraging for the bulls is the fact that the gold:silver ratio, while still elevated, has contracted at the start of this week as silver, which initially spurned gold’s rally, has caught up to a degree, and after dropping to $18.29 last week, is trying to regain $19.

The rebound in dollar terms was enough to lift the prices of both metals’ performance in, for example, euro, yen, and rupee terms.

Indian jewellery and silverware market shares

The silver market in India is currently verry strong, with local prices commanding a premium to loco London. The Indian silver jewellery and silverware sectors are a key element of overall silver demand, as shown in the chart; and if we take averages over the past ten years (note the massive fall in 2020) then India’s silverware demand was 60.2% of the global silverware market, jewellery was 28%; combined, India took up 35% of the two sectors and 11% of global industrial demand (excluding physical investment). These numbers are based on the Silver Institute / Metals Focus annual Silver Focus publication. It is unusual for gold not to be running in tandem with jewellery demand but can almost certainly be explained by the weakness of the rupee, which will be deterring gold purchases for now, but they will return when the market has got used to its new local price levels. Silver, as the cheaper option, is taking up the slack.

Finally, the Managed Money positions on COMEX extended their shorts in the week to last Tuesday 19th July, Gold was in a net short of 58t after very light long liquidation but more aggressive short-side trading (we would expect some of that to have been covered since). This is the largest since 23rd April 2019 and compares with a 12-month average of 243t long. Silver is at 2,257t short, with after reasonable liquidation but also more aggressive short side selling. The outright short is 8,220t the largest since July 2019 and is 75% larger than a 12-mnth average of 4,720t. Earning – if anything spooks the market a short-covering rally could be violent.

Gold, silver, the ratio and the correlation; short term

The next FOMC meeting is on the 26th and 27th of this month.

Gold Managed Money positioning up to 5th July close

Silver Managed Money positioning up to 5th July close