Weekly Precious Metal Roundup

And we thought two weeks ago was busy!

Gold has been overbought since $2,065…

Gold up by 6.6% and silver “only” 7.2% - in a solid market silver would be up by 13%

Massive net long increase on COMEX in week to 5^th March

Correction necessary when the momentum fades; could be sharp

We wrote last week that the reduced strength in US economic numbers at the start of March were the trigger for gold’s lift-off. At that point gold was trading just above $2,050; as I write it has tested, but just failed at, $2,200 and is still massively overbought.

While there has been no specific trigger for further strength over the past week, there is a heady cocktail of background factors that are informing the gains, plus of course there are key trade-related issues.

The background factors include the following: -

• As usual, close scrutiny of the Federal Reserve and the perception of timing of the first rate cut (the bond market is now pricing in a 61% chance of the first cut in June, although at least one Fed governor is urging more caution (see below))
• Potential weakening in the dollar further down the line
• Heightened and worsening geopolitical issues including China/Taiwan, Red Sea/Gaza, the fact that there are fifty regional or general elections this year (notably the United States). This is particularly worrying officials within the independent banking sector, notably the majority of members of the Association of Certified Chartered Accountants who believe that the number of elections this year is the most “under-estimated risk” for 2024
• Allied to this are persistent simmering stresses in the banking sector around the world, notably in the small-to-medium size in the United States and elsewhere. The Commercial Real Estate sector in the States is still under some pressure, while the Chinese property market remains in dire straits.
• The knowledge that the central Banks remain on the buy-side (last week China reported further acquisition in February has also cooluroed snetiemtn

Meanwhile in some more detail; Jay Powell delivered his semi-annual testimony to Congress last week. The previous week’s release of the core PCE deflator, a key parameter for the Fed, was down on a year-on-year basis, printing at 2.4% from 2.6% - but month-on-month it was up from 0.2% to 0.3%, which again implies caution from the Fed.

• The risks to achieving the mandate have been moving into better balance
• Committee “acutely” aware of the risk of reigniting inflation
• Unemployment remains at 3.7%; strong job creation has met an increasing supply of workers and continued strong immigration; labour demand still exceeds supply
• Core PCE 2.8%; longer-term inflation expectations remain well anchored
• Policy rate believed to be at its peak of this cycle
• If the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year [our highlights]
• Fine balance to be drawn between reversing recent progress and unduly weakening activity
• More confidence needed with respect to inflation before it is appropriate to reduce the target range

Meanwhile Raphael Bostic, President of the Atlanta Fed, is talking of the first cut to be in Q3, followed by a pause. Mr Bostic has also said that he is concerned that there is over-exuberance in businesses and that a rate cut could generate a wave of fresh demand that would feed inflationary flames. He does not expect back-to-back cuts and this chimes in with Jay Powell’s messages about action being data dependent.

The next FOMC meeting is March 19-20 and will carry the latest Special Economic Projections including the dot plot.

In summary, gold needs to correct and given that a good part of the run has been driven latterly by the election of stops, momentum trading and a band-wagon effect. When momentum fades, expected a correction. It is also telling that silver has not run up by twice the percentage that gold has, which is the norm in a confirmed gold bull market. Since 1st March gold has risen by 6.6% and silver by “just” 7.2% and indeed is already starting to correct.

Gold; year to date

Source: Bloomberg, StoneX

Bond yields one month view

Source: Bloomberg, StoneX

Source: Bloomberg

Gold (inverted) and the two-year and ten-year yields, January 2023 to date

Source: Bloomberg, StoneX

Gold silver and the ratio; silver’s correlation with gold and with copper

Source: Bloomberg, StoneX

In the background the change in Commitments of Traders in the week to 5^th March saw a massive swing in net long position with outright longs adding 40% (128t) and shorts contracting by 26% (39t), with the net long rising to 341t against a 12-month average of 229t. Silver added 18% (1,168t) on the long side and shorts were down by a whopping 45% (1,870t) to take the net long to 2,381t against a 12-month average of 4,565t short.

Amongst the Exchange Traded Products, the latest figures from the World Gold Council (to 29th February) showed a drop of 100t year-to-date to 3,126t; Bloomberg figures, which are not as comprehensive as those from the Council, but nonetheless give a good gauge of sentiment, suggest a further reduction since then of 8.4t, to an estimated total of 3,118t.

Silver ETPs have also been under pressure. There has been some scattered buying interest, but sellers have kept the upper hand, for a net drop of 648t year-to-date, to 21,121t (world mine production is approximately 26,500t).

Silver technical; resistance from the 200D moving average

Source: Bloomberg, StoneX

Gold COMEX positioning, Money Managers (t)

Source: CFTC, StoneX

COMEX Managed Money Silver Positioning (t)

Source: CFTC, StoneX

Source: Bloomberg, StoneX