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By: Rhona O'Connell, Head of Market Analysis
Gold eases as debt talks make some progress
Key points:
The debt ceiling is, understandably, taking up an increasing amount of news coverage. As we write this piece President Biden and House Speaker McCarthy are due to meet later today (22nd May) to negotiate directly. In a nutshell, the debt ceiling is a Congressionally-imposed limit on the amount that the Government can borrow and once reached, there is the possibility of default, which would be – in the words of Treasury Secretary Janet Yellen, “catastrophic”. In fact the debt ceiling was reached in January, but since then the Government has tapped into some government-run pension fund payments in an effort to keep things moving. There are two proposals that have thus far been polarised – President Biden wants a “clean” raise in the limit; the Republicans have set their face against this, calling for spending cuts. House Speaker McCarthty has manged to dilute this a little but the two factions are still a long way apart – although, while talks broke down last Friday there has been movement over the weekend and the markets are now thinking in terms of an agreement by the end of the week.
Historically this wrangling has happened many times before, but the political stances seem more entrenched than in most other cases. The markets are in limbo accordingly, but the expectation that, as usual, a compromise will be reached, has helped to take some of the recent heat out of the gold market.
As a result spot prices dipped below the support band of $1,980-$2,000 at the end of last week, but some interest took gold back towards the $1,980 level over the weekend and it edged over the key moving average indicators, with the 200-day at $1,981. Silver reacted in the usual way; while gold’s intraday high-to-low fall over the week was 5%, that of silver was 10%, which is typical as the beta between the two is usually between 2 and 2-1/2 times [since we wrote this the price has slipped towards $1,960on positive noises from the Biden-McCarthy meeting, although no agreement has yet been reached].
These moves have been partly driven by currency movements as the dollar has edged higher on the markets’ cautious optimism that the impasse could be resolved by the week’s end – along with renewed hawkish comments from some Fed officials. The Minutes of the FOMC’s most recent meeting will be released mid-week and will of course be scrutinised for shifts in stance, but the debt ceiling will take priority.
Gold in major currencies, short-term
Source: Bloomberg, StoneX
Fed funds market 22nd May
… and on 15th May
Source for both charts: Bloomberg
Gold, technical indicators; improving but not yet conclusive
Silver, technical indicators improving with spot now above all the key levels
Source for both charts: Bloomberg, StoneX
Meanwhile key Asian governments are back in the gold picture with China reporting increased gold reserves for the sixth month in succession. These reports have been sporadic over the years, sometimes showing no change for months on end and then showing a big change in one report.
For example, holdings were reportedly unchanged at 62.64M (1,948t) ounces from the third quarter of 2019 until October 2022, since when they have reportedly increased steadily to reach the current level ( 2,077t). At current prices the Bank’s gold holdings now amount to 4% of gold+FX combined, compared with a global average of more like 14-15%. As we have noted before, though, this latter level is skewed to the high side as it includes not only the United States, but also European countries that have high gold holdings as a legacy of the gold standard. If those countries are stripped out then the global average is more like 9%, meaning that China’s recorded holdings are still less than half the global average.
And finally, the Reserve Bank of India announced on 19th May that it is withdrawing the 2,000 rupee note (currently equivalent to $24.15). Private holdings must all be in bank accounts or switched into other denominations by 30th September. This has boosted Indian bond prices and local economists are suggesting that it may also stimulate spending activity, which could benefit gold. This makes sense up to a point, but it is not inevitable, especially as the notes account for only 11% of Notes in Circulation and that they are not commonly used for transactions. Time will tell.
Gold and silver COMEX positions (tonnes)
Gold
Silver
The action to 16th May saw a small (11t) contraction in Managed Money gold longs and a ten tonne rise in shorts, to leave the net position more or less unchanged. Silver saw a big change in sentiment, with a 20% or 1,781t drop in outright longs and a 5% increase in outright shorts, taking the net position down to 2,046t from 4,081t the previous week. We had said that there was a speculative overhang; there was – and there still is.
Source: Bloomberg StoneX
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