Sell-off: the final stages?

Gold and silver prices fell further this week as traders assessed increasing evidence that central bank interest rate policy is likely to drive major economies into deepening recession, potentially undermining commodity prices and those of gold and silver. In European trade this morning, gold traded at $1705 having dipped below $1700 yesterday, for a net fall of $31 from last Friday’s close. Silver fell a dollar to $17.90 over the same timescale.

As our headline chart shows, gold has lost 7% of its dollar price this year so far, and silver 24%. But this sell-off has also seen WTI oil fall 31% since early June. Driving the relationship between the dollar and commodities has been a strong dollar measured by its trade-weighted index. This is next.

Through derivative markets, it is this relationship with other major currencies — principally the euro — that is driving all prices. In the real world, we see the Fed embarking on a higher interest rate policy, while the ECB and the Bank of Japan are dragging their heels. The Bank of England and the Westminster politicians are in limbo. Through derivatives, speculators are buying the dollar by shorting the other currencies, and cutting long positions in commodities, including gold and silver. There is no physical gold and silver other than very small quantities, and minor central banks are hoovering up what they can while the opportunity lasts.

While gold and silver bugs are undoubtedly dismayed by headline prices, they should be aware that the establishment — the bullion banks and market makers ­— are closing their short positions. This next chart illustrates it in silver.

Bullion banks and market makers almost always take the short side on Comex, which means that Open Interest is an excellent overall indicator of their books. We see that it is as low as it has ever been since 2015. And looking at the underlying numbers, we find the Managed Money category is unusually short. This is next.

Other than the 2018-2020 bear market which saw silver sold down to under $12, the hedge funds’ net position is as oversold as it gets, being net short 15,824 contracts, representing 79 million ounces, in a market where there is very little physical silver available. This is a setup for a major bear squeeze.

The ineptitude of hedge funds is more clearly illustrated in the Comex gold contract.

Since January 2021, the Managed Money position has shown aa high correlation with the gold price. What this means is that when the gold price is high, hedge funds are long, and when it is low, they are short. In other words, they consistently lose money, and their net position is an excellent contrary indicator.

In the real world, common sense and observation tell us that falling commodity and precious metal prices are a pause in the declining purchasing power of all currencies. And that with Russia being the largest energy exporter in the world, trade relations will almost certainly lead to further price shocks this autumn.

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