Dollar strength continued to be the overriding feature of markets this week, and in common with the majority of commodities, precious metals were correspondingly weak.Gold and silver are now 11% and 10% down on the year priced in dollars, but less so in other currencies.
In futures markets, the overall technical situation is that the dollar is wildly over-bought, and shows all the technical characteristics of a bubble. The other side of the trade that this report focuses on, gold and silver, are correspondingly oversold, with speculative shorts at record levels. The next chart shows the net short position for the managed money category.
The normal market position is for speculators, such as hedge funds, to be net long, averaging about 110,000 contracts. Only twice since the Commitment of Traders disaggregated data has been made available has this condition not been true: last July and today. The market's sentiment is indeed at an extreme, making the paper markets vulnerable to a sharp correction of trend. The problem, as with all bubbles, is that we know this must end soon and violently, but we don't know at what level prices will revert.
Meanwhile, demand for physical metal notches up on every markdown. The reason this can occur and prices still fall is that there is a large body of above-ground stock in vaults to draw down. However, the stock in western vaults has been depleted by accelerating Asian demand, far in excess of the sum of mine production and scrap. Since 2011, the Chinese public alone have taken delivery of 8,645 tonnes of gold, during which time annual demand has more than doubled.
It is important to note that Asian buyers are savers, rather than investors. This distinction is crucial: a saver invests for the long-term and is only interested in value. Investors nowadays are interested in a shorter time horizon, are generally unconcerned with value, and will only buy into a rising trend. The price of gold expressed in the main Asian currencies is therefore relevant in getting a feel for physical demand, and this is shown in the next chart.
This year, the price of gold has only risen in the weakest of these currencies, the Turkish lira. Priced in Chinese yuan, Indian rupee and Saudi riyal, gold is down on the year and therefore demonstrates improved value for savers in these currencies. As for the Turkish lira, it is historically the weakest of all these currencies, and no Turk holds lira unnecessarily, which is why so many transactions in the region are conducted in gold.
Yesterday the ECB dropped its deposit rate to minus 0.3%, a move that was generally expected. The result was bear closing against the dollar in both euros and sterling, which rose sharply. At the same time equity markets fell sharply, with the German Dax hit very hard. It could be that the dollar is cracking at last. If so, it is only a matter of time before fundamentals begin to reassert themselves, and price extremes correct.
Japan: Leading Indicator.
UK: Halifax House Price Index.
Eurozone: Sentix Indicator.
US: Consumer Credit.
Japan: Bank Lending, Current Account, GDP.
UK: Industrial Production, Manufacturing Production, NEISR GDP Est.
US: IBD Consumer Optimism.
Japan: Key machinery Orders, M2 Money Supply, Economy Watchers Survey, PPI.
US: Wholesale Inventories.
UK: Trade Balance, BoE Base Rate.
US: Import Price Index, Initial Claims, Budget Deficit.
UK: Construction Output.
US: PPI, Retail Sales, Business Inventories.
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