Precious Metals talking points 092623: Precious weekly round-up for StoneX Bullion; Silver showing the way?

By: Rhona O'Connell, Head of Market Analysis

Tue, 26 Sep 2023, 06:40

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Precious Metals Talking Points: weekly round-up for stonex bullion; silver leading the way?

26th september 2023

Rhona O'Connell

Head of Market Analysis, EMEA & Asia;

+44 203 580 6115; mobile +44 7384 833 897

rhona.oconnell@stonex.com

Gold rallied ahead of FOMC then gave back the gains; net unchanged over the week
Silver, by contrast, gained almost 3% over the period and is bucking external influences
FOMC did indeed pause, but with room for manoeuvre, as usual
Solid US employment numbers underpin likelihood of a further hike
EU construction sector trying to stabilise…but confidence is on its knees
China; yuan still under pressure, Shanghai price at 4% premium to loco London
When a range-change eventually happens gold upside is favoured rather than down

Gold is still range-trading even after the Federal Open Market Committee (FOMC) decision last week to keep the fed funds target rate at 5.25-5.50%, with the markets now starting to agonise over the likely course of action from the Committee in the November meeting.

Bond markets’ Implied fed funds target rate

Source: Bloomberg

The fact that the Committee has kept its options open was widely expected, but gold remains on the defensive, at least, and the price is still marking time. What often happens after long periods of little movement is that the market starts to build up a head of steam, presaging a change of range, usually prompted by an external influence. Opinions are divided as to whether the next move will be up or down, but the consistent support at and below $1,900/ounce and persistent geopolitical tensions work in gold’s favour; while the problems in Europe and China are helping to underpin the dollar. This latter factor is currently more influential on gold price movements than the fact of economic uncertainties, which are normally supportive. It is theoretically also supportive that the Fed’s dot plot (the grid showing where each member expects the fed funds target rate to end this year, next year and further out) was more aggressive than the markets had been expecting. Normally this would dent gold’s position, but it has been largely shrugged off this time.

Gold and the weighted dollar index

Source: Bloomberg, StoneX

What is interesting here is the action in silver. When gold is moving sideways silver will often turn to its industrial nature rather than its reputation as a precious metal. Remember that silver’s “precious” connotation comes from its history as an international currency plus its use in jewellery; this often overshadows the fact that roughly 60% of silver’s demand is actually industrial and so it has a dual personality. It thus has a reasonably strong relationship with copper and the fact that copper has been in retreat since the start of August should be undermining silver’s price action. Since the start of August silver has also lost some ground, but to a lesser extent than copper and, more significantly in the short term, silver has been gaining ground since mid-September while copper has been falling.

So a sideways gold price and a falling copper price would normally be expected to put silver under pressure, but this time this is not the case. There are two possible reasons for this; one is the fact that silver is (currently, at least), vital to solar cells and that industry is booming, with some estimates expecting a 40% gain in demand this year against 2022. This is important for investor sentiment. As far as the fundamentals are concerned, even this rate of growth in solar is not enough to stop silver, in our estimates, from posting a surplus this year and it will therefore mean that rising prices will need help from the investment community. That is not happening at the retail level so we need to look at the activity of the professionals.

Which is where we come to the second potential explanation for silver’s outperformance in recent days, even though that outperformance is relatively small. Investors and / or speculators may be taking long positions in silver ahead of doing something similar in gold. This is common practice. Silver’s higher volatility often prompts gold speculators in particular to trade silver as well because it gives them additional leverage; and because silver is a small market, they will often approach silver before they look to trade in gold. This applies both to buying and selling.

So we now need to look at recent silver ETP and COMEX activity to see if they give us a clue.

The CFTC figures don’t tell us much. In the week to Tuesday 19^th September, silver dipped then rallied, opening at $23.08 on 12^th and closing more-or-less unchanged at $23.20 on the 19^th. That doesn’t mean that we shouldn’t look at the numbers, though; they tell us that over that week outright long Managed Money positions rose by 3% or 158t, and shorts contracted only very marginally, by less than 1% and taking the net long to 218t against a twelve-month average of 1,647t. Over the past four weeks to 19^th September, changes in longs and shorts have more or less cancelled each other out, with losses of 610 and 606t respectively.

COMEX Managed Money Silver Positioning (t)

Source: CFTC, StoneX

So no immediate guidance there.

The Exchange Traded Products do shed a little light on the situation. In July and August combined, the silver ETPs lost 953t, or 4% of end-June holdings. In September sentiment has been more positive, with seven days of creations from a total of 16 trading days, for a net gain of 170t. So we can – just – argue that silver is starting to attract attention and by extension this could spill over into gold. But we suspect that an external force will be needed to kick-start gold into life.

As far as gold is concerned, the week to 19th September saw gold outright Managed Money longs rise by 3% or eleven tonnes, with shorts contracting by 11% or 29t. This takes the net long to 147t against a twelve-month average of 156t. Exchange Traded Products have seen only one day of creation so far in September, and that was at the end of last week, with a small addition of just two tonnes after losses of 33t in the rest of September. Year-to-date, the gold ETPs have lost 163t (5%) since the start of the year to stand at 3,309t (world mine production is approximately 3,650t).

Gold COMEX positioning, Money Managers (t)

Source: CFTC, StoneX

This is how we closed last week’s note; “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”. There is no reason to change the view, beyond some possible support from silver.

	26 September 2023	Previous week	% change	Year-to-date	Range Jan 2022 onwards		Range as %
					Min	Max
Gold (pm LBMA price)	1,927.35	1,927.70	-0.02%	4.56%	1,628.75	2,048.45	25.77%
Silver (LBMA price)	23.65	23.06	2.56%	-5.00%	18.39	26.03	41.56%
Platinum (pm LBMA price)	940.00	927.00	1.40%	-13.12%	873.00	1,128.00	29.21%
Palladium (pm LBMA price)	1,275.00	1,270.00	0.39%	-28.97%	1,200.00	2,125.00	77.08%
S&P 500	4,320.06	4,450.32	-2.93%	12.97%	3,583.07	4,588.96	28.07%
$:€	1.0653	1.0657	-0.04%	-0.13%	0.9749	1.1236	15.25%

Source: Bloomberg, StoneX

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