StoneX Bullion round-up Monday 1st August 2022

• Some nibbling in the gold ETPs for the first time in over a month…
• … as part of a rally that started on the FOMC outcome
• Silver’s rally outstripped gold as the former returns to the fold
• Is sentiment changing or is it too soon to tell?

Short term gold price movement

The Federal Open Market Committee (FOMC) meeting concluded last Wednesday and was followed by Fed Chair Jay Powell’s Press conference. The FOMC did, as expected, raise the fed funds target rate by 75 basis points to a range of 2.25-2.50%. There were a couple of key differences in the Statement from that of June. In the June Statement the FOMC referred to economic activity appearing to have picked up after edging lower in the first quarter of the year; in July it opened by talking of how indicators of spending and production have softened. It also omitted the June reference to China’s lockdowns impeding the resolution of supply chain disruptions. Otherwise, it was effectively the same as the previous month, with the Fed’s continued determination to bring inflation down towards the 2% target. Mr Powell rejected the notion that the economy is in recession, although the GDP figure that came out later in the week was negative for the second successive quarter, which fits the narrow definition of recession (but there are varying opinions among economists as to how a recession should properly be defined).

In his Press Conference Mr. Powell did say that “another unusually large” rate hike might be appropriate at the meeting on 20-21 September, but again placed emphasis on the importance of the economic data that emerges between now and then; he also said that the Fed would reduce the rate of increases “at some point” but given that there are already clear signs of slowing activity this is not surprising. The housing market, which comprises 32% of U.S. CPI, is slowing dramatically, although the level of housing inventory, while rising, is still slow enough to give the market some vestige of buoyancy and the jobs market is still tight with more than two jobs available for anyone seeking work. In an echo of Christine Lagarde after the European Central Bank’s meeting the previous week, Mr. Powell said that the Fed would make its policy decisions on a meeting-by-meeting basis rather than giving explicit guidance in advance, but he did imply that the market-neutral rates of 3.4-3.8% look to be a viable target for end-year.

Technical construction improving

So, the picture is a little clearer, but not by much and this uncertainty will have helped gold’s rally. Gold came to life as the Powell press conference started (and equities rallied while bond yields fell), enjoyed three days of rising prices and is edging higher again at the start of this week. Some of this activity was almost certainly end-of-month book-squaring and while the move in the immediate aftermath of the FOMC meeting was lively, the rally is currently not much more than a correction from the five-month price decline from the $2,070 high of early March; in fact, as we write the spot price has exactly completed a 23.6% retracement, which is the first Fibonacci target. Meanwhile the ten-day moving average is now at the same level as the 20-day, having been below it since mid-June, and the spot price has completed a reverse head-and-shoulders, which could, theoretically, imply a further $89 upside potential which, if fulfilled, would take gold into the stiff resistance that stands between $1,810 and $1,875.

Silver now back in gold’s camp

Meanwhile silver has finally found some legs and rallied alongside gold. Gold’s gain from the $1,681 low of 21st July is currently of 5.5%. That of silver is from $18.2 to $20.4 and 12%. This beta of 2.2 is typical of the gold:silver relationship when they re-establish themselves as a pair – for the past few months silver has been shadowing copper more closely than gold. The gold:silver ratio has also contracted from recent highs above 90 to stand now at 87, and silver’s move has cleared the Fibonacci 23.6% level that is currently hampering gold.

Silver; technical plus the gold:silver ratio

Meanwhile the attrition in the Managed Money positions on COMEX eased off slightly in the gold market last week with a small increase in outright longs and a slightly larger increase in shorts, leading to a net increase of just one tonne in the net short. Silver saw a small 50t increase in longs, but another sizeable addition to shorts, of 657t. So, the net short, at 2,864t, is the largest since late May 2019.

Gold Exchange Traded Products have seen two days of new creations. The tonnage is small, but it does reflect some bargain hunting following the outcome of the FOMC meeting. Silver, however, continues to be eroded.

Inflation yet to be tamed on either side of the Atlantic

The contraction in the U.S. GDP for Q2 was 0.9% quarter on -quarter and translates into a 1.6% increase year-on-year. Personal Consumption was up 1.0% Q/Q, while the core PCE price index jumped in June (having eased in May), taking the Y/Y figure to 4.8%. This latter is the one that the Fed watches very closely. The headline figure was 6.8%.

Meanwhile the EU inflation number, released at the end of last week, came in at 9.6% Y/Y, well above expectations, which points to further rate hikes and continued difficulties for the ECB given that the EU economy is still struggling, especially in the face of the energy market dislocations.

It is too early to make a substantive call, but recent actions suggest that gold is starting to look at market uncertainties as supportive rather than fears of interest rates choking things off. The recent rally is still only a correction, but may be a sign of shifting sentiment, especially as silver has moved too.

Gold; managed money positions on COMEX, to 26th July; tonnes