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By: Rhona O'Connell, Head of Market Analysis
Key points:
The markets are again concentrating on the Fed, especially given the continued underperformance of key U.S. parameters. This has raised fresh debate about what the Fed is most likely to do at its meeting next week, but the Members of the Federal Open Market Committee (FOMC) have been standing by their relatively cautious stance and the markets are therefore still looking at a 25-point hike. In the Minutes of the February meeting there were clear signs of developing divergence of opinion among participants about shorter-term activity, but the 2% target remains the bulwark; indeed prior to the stresses showing up in the banking system the incoming data were leading some participants to raise their interest rate projections by comparison with December 2022; the bank issues, however, meant that this has now been reversed and the projections were back to the December target levels.
Fed funds market 24th April
They also noted, among other things, that cumulative policy firming was restraining business investment and that this would be exacerbated by the stresses in the banking system. This, in theory, should be supportive for gold as it points to a degree of economic ucertainty. The bank stresses do appear to have eased, but experienced banking analysts continue to point to the fact that they do tend to linger for months and that the mid-tier banks in the United States and possibly some of the larger ones in Europe may still have problems ahead of them. This, too, should be supportive for gold, but we do now apepar to be in a period of limbo and this is also reinforcing the need for a period of price consolidation.
Debt ceilng back on stage
Meanhile, economic numbers have disappointed and the Statement and Press Conference following next week’s FOMC meeting (Tuesday/Wednesday) will be of especial interest. In the background the wrangling in Washington continues over the debt ceiling (i.e. the level of debt that Congress imposes on the Government’s borrowing); this is by no means unusual and it normally goes right down to the wire with the ceiling only being raised at the last possible moment. One area of concern here is that the slowing economy is reducing the federal tax take and this means that the government debt may reach its limit in June, rather than previous estimates of July. It is worth noting on this point that the credit default swap on US sovereign debt has risen very sharply. This means that anyone who wants to insure against a U.S. default is having to pay higher rates because of the reluctance of potential sellers. Bloomberg points out that the US CDS is sharply higher and now at levels not seen since 2011, and this certainly sugggests nervousness. This, too, should support gold.
US five-year CDS
As far as gold is concerned, these background developments have actually put some pressure on prices, although in fairness the run to $2,040 meant that gold had become overbought and a correction was more or less inevitable. Some speculative positions have been liquidated and it is possible that there was some producer selling at these levels. In the background the physical markets have also weakened and need some more time to adjust to the higher price range.
Dollar moves have not been especially significant in this most recent period, with gold prices easing in euro terms, and continuing their downward path in Swiss francs, while holding broadly steady in yen.
Silver, by contrast, seems to remain among the darlings in the investment space and continued to benefit from good buying activity for much of the past week, although this metal’s run, too, took it into overbought territory and after testing $26 it has eased and is consolidating around the $25 leevel, with the gold:silver ratio holding stead at just below 80. There is a very good body of support in the charts at between $23 and $24 and this should serve to support the price in the event of any further weakness.
Gold and the key technical indicators
Exchange Traded Products:
Gold’s period of consolidation has been reflected in (and of course in part driven by) the lack of activity in the ETPs, which have been very narrowly mixed over the past week, hovering around 2,906t. This marks a small increase over the month to date of just below ten tonnes for a net loss year-to-date of 18t.
Silver ETPs, by contrast, have seen some light profit taking, falling by 1% or 226t over the week to 23,242t; this compares with annual mine production of 26,193t in 2022 (Metals Focus figure).
CFTC numbers from 11th April to 18th April (Tuesday to Tuesday);
Over this period gold oscillated, opening at $1,991 and closing at $2,005. Silver opened at $24.87 and closed at $25.19.
Gold; Managed Money positions increased slightly on both sides of the market, with longs adding seven tonnes to 427t and shorts, 12t to 107t. Net therefore dropped from 325t to 319t and compares with a twelve-month average of 111t.
Silver also saw expansions on both sides with the outright longs rising to 7,886t, the highest since April 2022 and compared with a 12-month average of 6,113t. Shorts rose 687t to 4,701t, a five-week high leaving the net at 3,185t, against an average of 698t.
Gold: managed money positions on COMEX (t)
Sales of gold Eagle coins, as reported by the U.S. Mint, have slowed in April. After 215,000 ounces of gold Eagles (6.7t) in March, the first three weeks of April have dropped to 122,000 ounces (3.8t) and are running at a steady rate. Silver remains very popular, though; Eagle sales in March were 900,000 ounces (28t) and in the third week of April the run rate doubled; after 450,000 ounces in the first two weeks, the third week saw another 450,000 ounces added.
Now we await the FOMC meeting and will keep a close eye on the wranglings on The Hill.
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