Gold market report: the yellow metal is still oversold

This was foreshadowed in last Friday’s Market Report. But they became very skittish – some changing their minds on a mini-bear squeeze in both gold and silver, triggered during Ben Bernanke’s testimony to the House Financial Services Committee on Tuesday. This saw prices spike upwards and open interest in gold futures fall sharply between Tuesday and Wednesday as some of these positions were closed out. The Commercials will have booked some profits, but gold is still oversold, with a large number of hedge funds still short on technicals.

In silver the longs remain stubborn. There was a sharp fall in silver’s open interest, but that was entirely due to the expiring March contract, half of which has been rolled into May, and the other half being closed. It looks like the major players who might have stood for delivery have decided or been persuaded not to do so: after all bullion supplies are very tight.

Both precious metals have seen small falls on the week after some wild swings, with gold losing a net $10 to $1,570 and silver 60 cents to $28.15 by mid-morning London time.

Standing back from the hurly-burly of the market place, expanding paper markets absorb speculative demand. This is also true of the bullion market in London, where the bulk of transactions do not involve delivery of the physical. Meanwhile investment demand – including fabricated gold and silver – continues to absorb more than mine output. The bears have argued that liquidation in gold ETF holdings is evidence of a change of investor sentiment and providing supply. This might have some truth only in gold, and the amounts are tiny compared with the demand elsewhere as people accumulate physical in preference to any paper – including ETF paper gold.

All this smashing of the futures price is in sharp contrast with February’s sales of silver eagles, which at 3,370,000 ounces is the largest February total ever, and it was announced that Russia and Turkey between them bought 22.5 tonnes of gold in January. But then those who speculate against the too-big-to-fail bullion banks lose most of the time, while those few of us who tuck true money away in the knowledge that all paper currencies eventually fail should be able to watch proceedings with the right degree of detachment.

The Week To Come

This week has seen a pause in what is increasingly being referred to as the currency wars. In Britain, however, the Conservative Party’s failure at the Eastleigh by-election might put sterling under pressure next week as the political ramifications ahead of the budget are digested. GBPUSD is approaching $1.50. Friday’s disappointing manufacturing numbers could add to the pressure in the pound in the coming days.

The Italian election has important implications for the euro, and with the austerity consensus now discredited there is no firm basis for Germany to lend money to the periphery nations. Perhaps in the coming weeks this will be reflected in further weakness in the euro, and it should be noted that EURUSD is falling to $1.30 again.

The deteriorating outlook for key currencies looks certain to ensure continuing demand for protection against systemic risk – resulting in a flight out of paper currencies generally. There are few announcements of import next week, given that it’s the beginning of a new month. For precious metals, Friday’s non-farm payrolls often lead to price volatility. Here is the list of the more relevant announcements to look out for.

Monday: Eurozone Producer Prices Index
Tuesday: Eurozone Composite and Services PMI; Eurozone Retail Trade
Wednesday: Eurozone GDP (second estimate); US Factory Orders
Thursday: UK Monetary Policy Announcement and bank base rate; US Initial Claims and Trade Balance
Friday: US non-farm payrolls; unemployment rate; wholesale inventories.