GOLD AND SILVER SELL OFF / MACLEOD FINANCE

Gold and silver sell off

Alasdair Macleod

The naysayers are crowing, saying gold and silver have peaked. 

This week’s volatility was certainly unnerving, a sharp lesson for whipsawed traders. 

But we assess the true position.

Gold and silver have had a turbulent week, hitting all-time highs yet again before a sharp fall on Monday, followed by sharp falls yesterday and this morning (Friday). 

In European trade this morning, gold was $5060 for a net rise of $70 on the week, having hit a high of $5597 on Thursday. 

Understandably, silver was even more volatile down a net $4.20 at $99.20, having hit a high of $121.50. 

Comex volumes in gold were high, while in silver they declined over the week.

Commentary in mainstream and social media overwhelmingly opines that gold and silver are too high, have topped out, are wildly overbought, and by implication will now decline significantly at least wiping out much of the explosive rise of recent weeks. 

It must be admitted that anything that rises 66% in a month as silver has done is going to see price violence both ways. 

But it matters why prices have risen to assess their future course. 

We shall start with gold. 

In London and Comex we can assume that the bullion banks do not possess much physical but have balanced or have net long positions in derivatives. 

We can assume this based on the recent LBMA’s opinion poll of their members which at the time was overall bullish. 

We therefore turn our attention to speculative interest on the buy side, and judging by Comex open interest in the managed money category, it actually declined as gold rose:

With this week’s expiry of the February contract, net managed money (hedge funds) will have declined even further. 

Clearly, gold is not a market being driven by speculative demand for Comex futures. 

Indeed, since the last COT report, open interest in Comex gold has declined by a further 69,000 contracts. 

How much of that is managed money we will only know next Friday night, but hedge funds net longs will have declined further.

In both gold and silver contracts, the hit to prices on Monday was ahead of options expiry on Tuesday, and the hit yesterday coincided with first position day, when traders who do not wish to deliver or take delivery must close or roll over their positions the day before to avoid being caught up in the delivery process. 

This involved 38,672 gold contracts on Wednesday night, and 2,572 silver contracts. 

It is always an opportunity to shake out flaky bulls or force them to crystalise a loss if they roll over into the next active contract.

All this suggests that the sharp falls on Comex were purely technical, and the passing of February contracts should see a rebound in prices in the next week or two. 

However, since Shanghai has been driving prices higher, we must account for speculative interest on the Shanghai futures exchange. 

Undoubtedly this is a factor, but the authorities have been quick to increase margin requirements to contain speculation, increasing them from today which might explain lower prices overnight.

However, shortages of physical are reported, with silver being drained from Shanghai Gold Exchange vaults and banks reportedly restricting withdrawals of gold bars from gold accumulation accounts.

Extreme volatility in gold and silver is to be expected, which is extremely dangerous for amateur traders. 

Hoarders should not be influenced by down days and keep in mind the reason they hold physical gold and silver, noting that they are in very short supply relative to demand in the markets which really matters — China, India, and other Asian centres.

Coincidentally, this is the week when the dollar’s trade weighted index fell below important support, confirming it is now headed significantly lower:

A bear market in the dollar against other currencies is doubly good for gold priced in dollars. 

Not only is the dollar’s value declining, but it is doing so more rapidly than those of other major currencies.