Gold and silver rising strongly

Gold and silver had a positive week, with prices rising strongly. In European trade this morning, gold was $2038, up $30 from last Thursday’s close (Friday was Good Friday), and silver was $25.95, up 100 cents. Silver’s outperformance, which is evident in our headline chart, has dropped the gold/silver ratio to below 79, having peaked at 91 in March.

Given the reduced trading over the Easter holidays, one would have thought that the shorts would have marked prices down aggressively to trigger profit-taking and to take out stops on Comex. But that didn’t happen. Factors limiting this strategy appear to be the shortage of physical, and that slashing paper prices merely encourages physical byers to acquire bull positions with a view to standing for delivery on Comex. Presumably there is a similar situation in London’s forward market. 

Commitment of Traders figures show that the Managed Money category on the Comex gold contract was broadly neutral on 4 April, at net long 110,131 contracts. That is the long-term average net long position. Open Interest has increased by about 17,000 contracts since then, suggesting that the hedge funds have room to buy more.

Our next chart illustrates Open Interest for gold and silver contracts, and they confirm there is some way to go before both contracts are technically overbought.

So, what’s driving the market?

There’s a growing conviction that CPI inflation is continuing to decline, and that the Fed will begin to reduce its funds rate later this year. That being the case, just as the Fed led the global rise in rates last year, it appears set to lead the decline. Therefore, the dollar’s trade weighted index is weakening. This is up next.

Rising dollar interest rates ahead of euro and yen interest rates drove the dollar’s TWI up from 95 to 114. There is now the prospect of them returning to 95. Undoubtedly, the confirmation of this downtrend when it breaks below 100 will lead to substantial hedge fund buying of precious metals futures. This is likely to put a severe squeeze on the Swaps, which are mostly bullion bank traders with short positions. This is shown next.

Already, by value gross shorts are approaching all-time highs, yet the market is not yet overbought. Furthermore, there is a background tendency for banks to curtail their derivative exposure to contain counterparty risk and for regulatory purposes. With the other Swaps, bullion banks could lose control of the market.

The prospect of the Fed reducing interest rates is not only likely to weaken the dollar, but it could accelerate foreign selling of financial assets. Already, we see foreign central banks selling dollars to buy physical gold, and buyers standing for delivery on Comex have taken out 3,808,500 ounces (118.46 tonnes) this year so far.

Add to this more and more nations opting to settle trade in Chinese yuan in preference to the dollar, and it is difficult to see what can stop it declining, and therefore the dollar price of gold rising.