StoneX Bullion Weekly Update

• Gold building on its past sell-off and consolidation; has probably done enough in the short term
• True to form, silver moved before gold and by a larger percentage?
• US numbers last week showed reduced confidence and a slowing labour market?
• Core inflation was below expectations but still won’t satisfy the Fed
• Europe confidence floundering; China not much better

We noted last week that while the first half of August saw gold and silver moving lower in the face of a stronger dollar and higher yields, it looked as if this was starting to turn around.? The mid-month rally did continue through to the end of August, with gold gaining 3.4% from $1,885 to $1,953 before correcting.? From a technical perspective this was a perfect 38.2% retracement from the fall from the $,2063 high posted on 5th April this year and is also going close to the completion of a double bottom.? To do this spot gold would have to reach $1,990, setting up the scope for a further gain of $107 over time, targeting $2,097.

Frankly this does not look feasible as the market has already seen some short covering on COMEX, which helped to boost the rally that we have just seen, and barring exogenous shocks it doesn’t currently look as if gold has the legs to complete that kind of move.

Gold : dollar relationship, one-year view

What would it take?

A substantial drop in the dollar and Treasury yields (possible but not that likely unless some really dire US numbers come through); or – if anything probably more likely – renewed stresses in the banking system that might generate a flight to quality.

What do the recent trading numbers tell us?

The latest numbers from the Commodity Futures Trading Commission (CFTC), which date to 29th August (and are therefore effectively a week out of date, but it gives us some guidance) show that the rally from 22nd August ($1,889) to the 29th ($1,938) was indeed accompanied by the addition of fresh longs in the Managed Money sector for the first time in six weeks, while short-covering also developed, also for the first time in six weeks.? The longs grew by 15% from 327t to 375t while the shorts contracted, also by 15%, from 299t to 253t, taking the net position into a long for the first time since mid-July.

The Exchange Traded Product investors have been less convinced.? From the spot low on 21st August there have been four days of creations from a total of ten trading days, which – while sporadic –? at 40% is a better rate than the rest of the year, which comes in at just 30%.? That said, the period in question still resulted in a net redemption of 9.7t.

And silver?

Gold’s exuberant sister metal was, as usual, more volatile and while gold rallied by 3.7% silver’s gain, to attack $25, was of 12.7%, before a much-needed correction towards $24. As we noted last week, silver will often move before gold because of the size of the market and its more volatile nature; and the CFTC numbers show that for the second week in succession silver enjoyed fresh Managed Money longs plus short covering to the extent that over the fortnight, longs increased by 11,767t or 37% and shorts declined by 11,382t or 30%.? This takes the COMEX net position from a short of 6,670t to a long of 16,479t, compared with a twelve-month average of 39,204t.? So on that basis there is no COMEX speculative overhang of any great size, but that was a substantial move over a period of just two weeks and it may now need some time to settle down.

Background influences

Underlying numbers suggest Fed policy is putting the brakes on…

As usual the US economy has commanded a lot of attention and a heavy raft of data hit the markets last week.? The underlying tone, with faltering confidence, a slowing in the job market and PMIs still below 50 has meant that the markets are now more or less writing off the possibility of a rate hike in the FOMC meeting of 19-20 September.? It will be particularly interesting to see how the dot plot projections shape up this time (this is the grid, produced once a quarter, on which each FOMC member adds a “dot” to show where they expect the fed funds target rate to be at the end of the current and following year, plus further out).

Bond markets’ Implied fed funds target rate

But the inflation target is still over the horizon

The Core PCE (Personal Consumption Expenditure) is a key parameter for the FOMC when it comes to framing policy.? While trending down, the latest number – released last week - was 4.23%, which is still way off the Fed’s 2% target and this is a cautionary note when it comes to the outlook for rates.? Whether September signifies the end of the Fed’s cycle or whether it turns out to be another “pause” will remain data-dependent, but one thing we can be sure of is that the Fed is unlikely to be in a hurry to start cutting rates.