Market Report: Firm undertone

Gold and silver prices on balance drifted with an upwards bias over the week, with a firm undertone. Interest was impacted by the US Thanksgiving Holiday. Given the near-certainty of a rise in the fed funds rate next month, plus the upcoming expiry of active contracts on Comex, this is something of a result. Monday saw a $2bn notional sale of gold futures (15,000 contracts, or 47 tonnes of gold), deliberately timed, it seems, to drive the price lower, which it did by $17.

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Gold on the week is down only $3, having recovered from Monday’s hit, to trade at $1290 in early European trade this morning, and silver is down 18 cents at $17.10. However, there could be significant volatility in the next few trading sessions, because the last trade date for November gold and silver futures is next Tuesday – 28th November. As of last night, there were 165,772 November gold contracts outstanding, either to be rolled into February, or closed. The slightest excuse for the shorts to bang the gold price will undoubtedly be taken. In silver, there’s 59,236 contracts to roll, so the situation there is equally fragile.

Presumably, it will depend on the dollar’s performance. All this week, a weak dollar has led to firmer precious metal prices, and vice-versa. The dollar index cash future lost about 1% on the week, on signs the US economy is going nowhere, and the December rate increase will therefore be the only one for the foreseeable future. Perhaps the bad news for the dollar is in the price, in which case, it could rally by close of trading on Tuesday, undermining precious metal prices.

That said, the resilience of gold and silver has been remarkable, defying every attempt to smash the price. To get an idea of what the bears are playing for, let us look at the gold price and relevant moving averages.

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The gold price remains trapped between the 55-day and 200-day moving averages, with the 55-day MA turning down. If the shorts can drive the price below the 200-day MA (currently at $1265), the longs trading on technical analysis can be expected to throw in the towel. A move towards the dotted line just above the $1200 level would be on the cards before the year-end.

Broadly, the shorts would like to close down at least 50,000 contracts, possibly more, to position themselves for 2018. Unless they can force the price below that $1265 level, this is a tall order. Furthermore, the character of the Comex market is changing towards greater use of physical bullion.

There is a line item in the daily Gold Volume report headed EFP (exchange for physical), where contracts are settled against physical. Over the last three years, EFPs have been growing, to the point where over the last four weeks, gold’s EFPs totalled 157,094 contracts (488.6 tonnes). Last Monday, an extraordinary 21,418 contracts were exchanged for 66.62 tonnes, which accounted for all but 3,235 contracts of the fall of 24,513 of December’s open contracts. This phenomenon is unexplained, but it suggests that net delivery of physical is increasingly being taken. Where it is going, is not clear, but it does at least suggest that the futures market is no longer the tail wagging the physical dog.

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