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By: Rhona O'Connell, Head of Market Analysis
We noted last week that gold’s rally was a reasonably healthy one and that prices had probably risen far enough for the time being. Since then gold has eased from the resistance offered at $1,950 and slipped towards $1,920, where it is finding some cautious support. Silver has moved in tandem and is finding support at $23, with the ratio between the two holding steady between 83 and 84.
The markets seem to be becoming more attuned to the idea that the Fed could yet raise rates in next week’s meeting, though the balance of opinion still favours a November hike. The Fed’s Committee members are now in their ten-day purdah so we will hear no more pronouncements from them until the Statement and Jay Powell’s Press Conference next Wednesday 20th September.
Gold and the ten-year bond yield
Source: Bloomberg, StoneX
Bond markets’ Implied fed funds target rate
Source: Bloomberg
Probably the key development in the United States last week was the release of the Fed’s Beige Book, which is a regular study undertaken by different Federal Reserve Banks around the country, culling views from businesses, investors and influencers; the results are thus not views of the bankers themselves, but of stakeholders in the economy; it is a key element relied on by the Fed when framing monetary policy.
This time the Book collated responses on or before 28th August. The summary was that most Districts indicated modest economic growth in July and August.
Consumer spending on tourism exceeded expectations and surged with what most contacts regarded as “the last stage of pent-up demand for leisure travel from the pandemic era”. Other retail spending, however, continued to slow and some Districts are suggesting that the pandemic driven growth in domestic savings has now been worked off and that some spending is being funded by borrowing.
New auto sales expanded in many Districts but this is being put down to better availability of inventory as opposed to increased consumer demand.
New orders were stable or declining, backlogs are shortening on waning demand for manufactured goods, and supply chains continue to improve.
So this is not that different from the Fed’s Staff’s economic views as released in the Minutes of the most recent Committee meeting, which was 26th July. Given that the members of the Committee are increasingly talking of monitoring the lagged and / or cumulative effect of monetary policy o economic activity, this most recent Beige Book is likely to be seen as “neutral” in that it gives further traction to the belief that the policy is working. But do remember that Jay Powell has been talking in terms of higher for longer when it comes to rates, as the Fed battles to regain the 2% inflation target. There are increasing numbers of market observers who think that 2% is not viable but that the Fed is unlikely to want to be seen to capitulate.
Meanwhile in the mechanics of the gold and silver markets of the past few days there have been some signs of bargain hunting and China reported an increase of 29t in its gold reserves, the tenth consecutive month of reported increases and taking China’s holdings to 2,165t. At end-August prices this would have been valued at $1.8Bn or 4% of China’s gold+FX combined. China’s foreign exchange reserves declined during August, which is due in most part to the defence of the currency. The Head of China’s State Administration of Foreign Exchange, Zhou Maohua, referred to the increase in gold holdings as “primarily aimed at optimizing the structure of official reserve assets, promoting diversification of official reserve assets, and enhancing the ability to withstand global financial market volatility and asset stability”.
What do the recent trading numbers tell us?
The latest numbers from the Commodity Futures Trading Commission (CFTC), which date to 5th September (and are therefore effectively a week out of date, but it gives us some guidance) show that the assault on $1,950 at the start of the month was accompanied by short covering; then the retreat from that level saw some light liquidation among the longs with the final result that outright longs declined by just one tonne and shorts contracted by 36t. This took the net long to 157t, more or less in line with the twelve-month average of 152t.
Silver saw reduced exposure on both sides, with 857t of long liquidation among the Money Managers and short covering of 354t, taking the net long to 2,146t, which is still a sizeable tonnage above the twelve-month average of 1,502t.
The Exchange Traded Product investors have been voting with their feet, with net gold redemptions of just under 18t on the month to 8th September, leaving holdings at 3,323t, a drop of 149t in the year-to-date (for context, global mine production is ~3,650 tonnes annually). Silver ETPs have also been losing metal with 336t leaving the products in eight consecutive trading days to stand at 22,088t. Global mine production is ~23,600 tonnes annually.
So for now the markets are cautious and barring any exogenous shock we can probably look for prices to drift in the near term ahead of next week’s meeting.
Gold, silver and the ratio, short-term
Source: Bloomberg, StoneX
| 12 September 2023 | Previous week | % change | Year-to-date | Range Jan 2022 onwards | Range as % | ||
| Min | Max | ||||||
| Gold (pm LBMA price) | 1,927.80 | 1,940.55 | -0.66% | 4.59% | 1,628.75 | 2,048.45 | 25.77% |
| Silver (LBMA price) | 23.01 | 24.65 | -6.63% | -7.57% | 18.39 | 26.03 | 41.56% |
| Platinum (pm LBMA price) | 900.00 | 983.00 | -8.44% | -16.82% | 849.00 | 1,128.00 | 32.86% |
| Palladium (pm LBMA price) | 1,207.00 | 1,227.00 | -1.63% | -32.76% | 1,200.00 | 2,315.00 | 92.92% |
| S&P 500 | 4,457.49 | 4,507.66 | -1.11% | 16.56% | 3,577.03 | 4,588.96 | 28.29% |
| $:€ | 1.0700 | 1.0780 | -0.74% | 0.31% | 0.9702 | 1.1236 | 15.81% |
Source: Bloomberg, StoneX
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Gold's breakout has landed in a month that history has repeatedly favored, and the seasonal record stretching back to 2000 helps explain why. A closer look at August returns, win rates and how the calendar shifts into September shows where the seasonal edge is strongest and where it fades.
Silver's push above its summer range has less to do with supply and more to do with a single diplomatic thread. A potential U.S.-Iran deal has become the swing factor for a breakout that is far from confirmed.
A document with a substantial number of slides and text, built for the Front Desk internal call and analysing market developments, the economic and political background and key market parameters influencing the precious metals. This week includes material on the Precious Metals, notably Gold's lively action; Powell and the Fed, EU and potential margin compression
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