Market Report: Passive commodity funds rebalancing

Jan 10, 2014·Alasdair Macleod

Gold and silver prices fell from early highs this week of over $1240 and $20.20 respectively to find good support at $1220 and $19.40. The first hit on the gold price was on Monday, when a large sale order drove the gold price down 2% briefly to $1215, from which after a ten second trading suspension the price immediately recovered all the loss. The following day another bear raid took gold down to test the $1220 level which held. It would therefore appear that the support level has moved up $20 from the $1200 level.

S&P, which administers the two main commodity indices tracking passive funds totalling $155bn, announced the terms of the annual rebalancing. This will involve the funds investing an extra $1.1bn into gold, the equivalent of about 9,200 Comex contracts over one week from last Wednesday, and on the information available I estimate 3,845 silver contracts. Further details can be found here.

The net result should be a minor upward bias for both metals, but whether or not this extra demand can trigger further price rises is yet to be seen. I sense the markets are bottoming out in the face of unanimous mainstream bearish opinion, and the automatic links between other markets, risk-on or risk-off etc., seems to be changing.
Perhaps the best way to judge these relationships is to monitor bullion's response to statistical releases, particularly the weekly unemployment numbers. The headline rate is always seen as an opportunity for market-makers, the majority of which run a short book, to mark gold and silver down. This usually succeeds in triggering stop-losses and encourages the bears to extend their positions.

Rinse and repeat. Today's Non-Farm Payrolls are expected to come in at 190,000 and the unemployment rate at about 7%. If the latter comes in at under 7%, that could be a significant test for bullion prices.

The bears on Comex presumably think there are still significant bulls to shake out. If this is the case they are ignoring the other bit of news embedded in S&P's rebalancing announcement: passive investors in the two commodity funds account for 95,555 gold and I estimate 37,476 silver futures, the equivalent of the entire Managed Money category long contracts on Comex.

There appears to have been liquidation of these commodity trackers in recent months, with S&P estimating the total pool, dominated by the tracker funds referred to above, having been about $240bn as recently as last November. So perhaps unwinding of these funds has been a factor in recent months, depressing commodity prices generally as well as those of gold and silver.

Next week


US: Budget Deficit
Japan: Bank Lending Data, Current Account Deficit.


UK: CPI, Input Prices, ONS House Prices, Output Prices
Eurozone: Industrial Production.
US: Import Price Index, Retail Sales, Business Inventories.
Japan: M2 Money Supply, Economy Watchers Survey.


Eurozone: Trade Balance.
US: PPI, Empire State Survey.
Japan: Key Machinery Orders.


Eurozone: HICP (Final).
US: CPI, Initial Claims, Philadelphia Fed Survey.


Japan: Consumer Confidence.
UK: Retail Sales.
US: Building Permits, Housing Starts, Capacity Utilisation, Industrial Production.