Conflicting signals for gold

Gold and silver came under selling pressure again this past trading week. However, this time it was not at the start of trading in the US. On Tuesday, in the Asian afternoon, gold came under pressure and fell through the low made the Friday before. This triggered further selling, which pushed gold down another 10$/oz. However, as the US trading session began later, gold also fell through the 1,700$/oz mark, which was regarded as support. During the further course of the week, gold and silver recovered, but were unable to pare the loss and ended the week lower. The PGMs on the other hand held fairly stable at the start of the week and advanced later to end the week higher. Thus, the question arises, why do gold and silver underperform the PGMs lately?

One factor supporting the PGMs had been the Platinum interim report from Johnson Matthey, which predicts that the market would be in a deficit. Statements this week from Norilsk Nickel that Russian palladium exports would decline due to decreasing Russian palladium stocks gave the market further support. This would explain the outperformance of the PGMs, but not the diverging price movements, which had been observed on some days. Also quantitative models show that there is a mutual impact of precious metal prices on the price of other metals of this group. Thus, there must be other reasons for the underperformance of gold and silver.

There appears to be a shift in sentiment for gold and silver among analysts and investors. This past week, Goldman Sachs – usually one of the most bullish Wall Street investment banks on commodities – revised their forecast for gold next year downwards. Analysts polled weekly by Bloomberg are normally bullish on the outlook for gold during the following week. Bullish readings below 50 occur but are seldom. The most recent survey shows a drop of the bullish index from 64.52 to 45.16 and the bearish index increased from 19.35 to 32.26. Thus, analysts are still slightly bullish on balance. However, the difference between the bullish and bearish index is at such a low level, that it approaches the region of extreme lows for this survey. Extreme analyst pessimism is often a good buy signal for gold.

The net long position in Comex gold futures held by large speculators had risen in November. However, the increase of the preceding three weeks had been almost completely wiped out by reducing longs and increasing short positions in the week ending December 4, according to the recent CFTC report on the “Commitment of traders”. The net long position dropped from 193,742 to 165,736 contracts. However, the non-commercials increased their net long position in silver futures further by around 2,500 contracts to 41,272 contracts.

On the other hand, the holdings in the SPDR Gold Trust ETF have risen this week by around 4.5 tons to 1,353.35 tons. However, hedge funds investing in this ETF appear to hold the positions over a longer period. Short-term trading oriented hedge funds seem to prefer the futures market. Thus, we interpret the recent development as dominated by short-term traders, while long-term oriented investors still accumulate gold holdings. This short-term selling reflects the uncertainty about the result of negotiations to avoid the fiscal cliff in the US. It is more a reflection of increasing risk aversion among investors.

A negative factor for gold had been the firmer US dollar against the euro, especially after the ECB press conference. As Mr. Draghi stated that the council discussed to levy a fee for deposits at the ECB by 25bp (also referred to as negative deposit interest rate), the forex and government bond market immediately speculated on a cut of the lending rate at the next meeting from 0.75 to 0.5%. However, Mr. Draghi also explained that the council refrained from this step because it believes that the announcement of OMT had pushed yields on peripheral government bonds much lower than another cut of the lending rate could do. Furthermore, in some countries, there is growing opposition on reducing the refinancing rate further because some banks would use this opportunity to borrow funds from the ECB and invest them in corresponding national government bonds. The ECB did not lower interest rates despite cutting the forecasts for the GDP in the eurozone significantly. It appears that the council prefers to keep the powder dry. Thus, the speculation on another ECB rate cut might be short-lived. The euro might recover the longer the ECB hesitates to reduce interest rates further. This would then be a supportive factor for gold.

As stated several times, our base line scenario is the US fiscal cliff will be avoided by a final hour compromise. Therefore, the current negative sentiment among analysts and short-term oriented traders might present a good buying opportunity for medium-term oriented investors in gold and silver.