Like Watching Paint Dry...

08/04/2014 12:00 am EST


Alasdair Macleod of examines how the impact of last week’s market developments was dramatic, not only on stocks, but on currencies and commodities as well.

That was how it felt watching all markets last week until Thursday when they sprang into life. Gold fell from $1304 at the London opening last Monday to a low point of $1281 last Thursday, down 1.8% on the week, while silver fell from $20.60 to $20.35, down only 1.2%. These moves were relatively small compared with action elsewhere. Here are the charts showing price and open interest for gold and silver on Comex.

Click to Enlarge

Click to Enlarge

Note how Open Interest (OI) in gold has collapsed by nearly 49,000 contracts since the peak on July 10. This is principally due to the August contract winding down, with only a portion being rolled into December. Silver's OI on the other hand has held up relatively well, and its performance relative to gold has been remarkably strong.

In both cases, the swaps category, which is mostly foreign banks, has recently accumulated large short positions. It will be interesting to see to what extent these positions have been closed down when the Commitment of Traders Figures for the second half of this week are released next Friday.

Precious metal markets weathered two important announcements on last Wednesday. First, the Fed's FOMC completed its two-day meeting, and unexpectedly one committee member, Charles Plosser, dissented from the agreed statement in more hawkish tones. And secondly, the first estimate for Q2 GDP at 4% annualized was significantly higher than market expectations, as if to drive Mr Plosser's point home.

The impact of these developments was dramatic, sending the dollar higher against all currencies, but most notably the yen. Bond yields rose from recent lows, and equities fell sharply with a 300-point fall on the Dow Thursday. Less rationally, commodity prices fell, with WTI crude falling through the $100 level to $98. So it is hardly surprising that gold and silver were marked down along with everything else.

Much of the fall was in US trading hours, so was a paper-driven gut reaction, and coincided with end-of-the-month book-squaring. It will be interesting to see if, over the course of last Friday, physical demand for precious metals returned in London at these lower prices.

We may find—in retrospect—that last week was pivotal. China's equities were sharply higher (up over 7% since July 21) on recent PBOC moves to ease liquidity strains, and the Japanese yen has started falling again having failed to break the ¥101 level. This may signal a return to the yen's bear market, which would be consistent with Japan's economic fundamentals. This being the case, we can expect yen carry-trades to profitably finance global bull markets for the foreseeable future. It should also rekindle Japanese demand for gold.

By Alasdair Macleod of

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