Market Report: Sell-off struggling to go lower

Dec 10, 2021·Alasdair Macleod

The sell-off in precious metals, now entering its fourth week, is struggling to drive gold prices lower, but silver is showing less resistance to this pressure. Since last Friday’s close, by morning trading in Europe today gold had fallen by $12 to $1771 and silver had lost 66 cents to $21.88. Driving prices is a determination by the bullion banks to reduce their short exposure by the year-end.

The year-end is important for two reasons. For all bullion banks with short positions, it is an important make-up date evaluated by prices relative to the previous quarter, the half year, and the previous year end. To any valuation profit or loss is added trading profits to determine dealer bonuses. Taking this as our queue, we see that gold will have to fall to $1725 to match the end-September close, $1770 for the half-year and $1900 over the whole year.

For silver, the September close was $21.56, June $26.12 and December $26.23. So, silver dealers will be targeting sub-$21.56 prices. Furthermore, Comex Open Interest in both contracts has contracted sharply. Our next chart is that of gold.

Ahead of the year-end, the bullion banks appear to be winning the spoofing game hands-down. But that is only Comex: we have no statistics on London’s forward market, generally acknowledged to be eight to ten times larger, and these activities are divorced from physical bullion.

The position in paper silver is particularly counter-intuitive, given factors in the physical market. Supply is constrained, yet industrial investment demand for clean energy to replace fossil fuels is leading to shortages of all the materials required. Copper remains in backwardation. Uranium prices, for which paper contracts don’t exist, have increased from $25 last December to $45 currently. Silver, which is not only vital for solar power, being the best conductor should be seeing even greater demand than uranium, and that is without even considering its monetary status.

The word is that the Swiss refiners’ silver output is pre-contracted into the middle of next year, a shortage likely to get worse. The situation in gold, where environmental factors don’t apply is easier. But clearly, gold is disappearing from the market at these prices. London vaulting figures were released for November this week and were marginally higher. But when one considers the drip-feed of mine supply through London, most of the excess seems to be going into other hands, such as central banks and the Asian jewellery trade.

A further consideration is the net stable funding ratio requirements applying in London from the end of this month. While it won’t force bullion banks to cut their books, bank directors with an eye to reputations will want to see uneven books reduced to as little as possible. For many individual traders manning bullion desks, this current market will be their last hurrah.

2022 is shaping up to a bullish year, driven by a combination of liquidity being withdrawn, intensifying supply shortages, and accelerating price inflation. It could hardly be more bullish, particularly for silver.


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