In the short-term gold remains range-bound, and after finding support in mid-July on its dip below $1,900 (some of which was believed to be institutional and some from the official sector), has traded between $1,900 and $1,950. For the time being we can probably expect it to stay in that range as there is plenty of resistance on the charts above $1,950 and the professional markets, at least, are not prepared to commit themselves until the Fed’s and European Central Bank’s interest rate policies become crystallized.
Gold and the weighted dollar index
Source: Bloomberg, StoneX
On that subject, the European Central Bank meeting last week did produce hikes of 25 basis points across all three major rates; this was the tenth consecutive meeting at which rates were hiked, taking the implied policy rate to 4%. The Bank’s Press Release straight afterwards notes that “Inflation continues to decline but is still expected to remain too high for too long.
The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner”. The Staff’s macroeconomic projections are looking for 5.6% inflation in the Eurozone this year, 3.2% in 2024 and 2.1% in 2025, thus revising 2023 and 2024 upwards, largely reflecting higher energy prices in the second half of 2023 (an environment that we do expect to persist at least through year-end) and 2025 downwards. Meanwhile stricter monetary conditions have tightened the financing environment, which is filtering into economic activity and reducing longer-term inflationary pressures.
That said, the European economic outlook is uncertain with real German GDP flat for the past two quarters and the eurozone’s GDP still positive year-on-year, but only just, and on a declining trend. With this in mind, the views expressed by different Governing Council members have been mixed, but the overall sentiment is very similar to that in the Fed, i.e., a) inflation too high; b) too much aggression could unbalance an already delicate economic recovery and c) don’t expect rate cuts to develop in the near-to-medium term future.
On that basis gold’s neutral performance at present should come as no surprise, since there is some degree of continued uncertainty over monetary policy, along with the need for a balancing act to avoid tipping into a recession on the one hand, and the concern that rate cuts too soon could reignite domestic spending and give more oxygen to the inflationary argument, on the other. All eyes still on Washington and the Special Economic Projections – but don’t forget China
Bond markets’ Implied fed funds target rate
Next stop: Washington, Wednesday. The FOMC’s two-day meeting concludes on Wednesday, and this (along with March, June, and December) is one of the four meetings each year that deliver the Special Economic Projections, including the “dot plot” in which each Committee member marks where they think the fed funds target rate will be at the end of the current and following years, plus further out.
The market will be scrutinizing this for the first hint of any rate cuts in 2024. We would expect a cautious outcome as the FOMC continues to concentrate on the combined – and lagged - effect on economic activity of its moves to date. It is therefore quite possible that having raised rates late in the day, that there will also be a delay in the onset of a cutting cycle.
US Inflationary expectations; readings and trends
Source: Bloomberg, StoneX
As far as gold is concerned there is much more to it than just relative interest rate levels. This is not a race for return, it is an exercise in risk mitigation and it is therefore arguable that gold has comparatively strong tailwinds, in the form of economic and monetary uncertainty and the risk of recession, especially given tighter financing conditions on both sides of the Atlantic and the possibility of continued stresses on the smaller and medium-sized banks, which in turn fund the smaller-to-medium-sized industrial entities that, in the United States at least, form the majority of economic activity. These elements are more important taken together than interest rate differentials taken in isolation. To that end it is instructive that, while the euro slipped in the wake of the ECB meeting, dollar-denominated gold prices rose.
It is also instructive that the Shanghai premium over London has been at record levels in recent days as the People’s Bank of China has continued to defend the renminbi. Local demand for gold has been moderately strong, but it is believed that the Bank has been reluctant to release import quotas as domestic purchases of gold would undermine the currency, which has independent problems of its own. The fact that this is a localised issue is thus affecting domestic premia rather than international prices, but it will be interesting to see what happens when the import quotas are reinstated.
So, for now, we have a market that is treading water, but the medium-term elements are, in our view, positive rather than negative.
Money Managers on COMEX
Gold COMEX positioning, Money Managers (tonnes)
Source: CFTC, StoneX
In the week to last Tuesday, during which gold had skipped slightly, from $1,940 to $1,912 (1.4%) and silver from $24.00 to $23.06 (4.0%), COMEX Money Managers shaved 2% of the long-side exposure, dropping 8 tonnes to 36 tonnes, while adding 19% (42 tonnes) to the outright shorts. The net long has dropped from 157 tonnes to 108 tonnes, compared with a twelve-month average of 153 tonnes.
Silver positioning came under more intense pressure (which is normal when gold is in retreat), with a 17% or 1,033 tonnes reduction in outright longs and a 25% of 1,021 tonnes gain in shorts. This took the net position from a long of 2,148 tonnes to a long of just 91 tonnes.
Silver COMEX positioning, Money Managers (tonnes)
Source: CFTC, StoneX
LBMA holds over a year’s silver mine production in its vaults
While this hardly puts silver into readiness for a short-covering rally, it does take some of the overhanging speculative pressure off the market, but investor sentiment is still very cautious towards silver at present and it is interesting to note that the tonnage in LBMA vaults increased during August by 414 tonnes to 27,305 tonnes (compare world annual mine production of ~26,000 tonnes); in fact, LBMA silver holdings have been rising since last November, adding 1,168 tonnes over the period.
Remember that silver supplies are constant and only 21% of global annual supply is price-elastic so while the base metal and gold mines keep producing the silver will keep on coming, regardless of demand.
Exchange Traded Products
The lack of interest is largely illustrated by ETP activity; since the start of August there have been only nine days of net silver purchases from a total of 34, although it is worth noting that the most recent three of those were in the start of last week when silver had slipped below $23. Since the start of the August the silver ETPs have lost a net 573 tonnes or 2.5% of end-July levels: losses year-to-date amount to 1,153 tonnes. Gold has seen just five net days of creation over the same period and have lost 71t to stand currently at 3,365 tonnes (global mine production ~ 3,650 tonnes) for a year-to-date loss of 107 tonnes.
There is currently little in the market environment, barring exogenous shocks, to stimulate fresh activity in this arena so we should continue to expect consolidation for the time being, with the potential for upside later in the year.
Taken from analysis by Rhona O’Connell, Head of Commodity Market Analysis for EMEA & Asia, StoneX Financial Ltd.