If it does not go up on good news…

After the release of the US labor market data the week before, there was no major data release scheduled for the week just ending. Thus, it were only speeches and statements by FOMC members, which had an impact on the markets. However, despite a slightly weaker US dollar, a firmer US stock market and yields on 10yr US Treasury notes edging down, the precious markets showed a disappointing performance. Only gold ended slightly in the plus, while silver and palladium posted stronger losses.

At the beginning of the week, it was the president of the Federal Reserve Bank of Atlanta, David Lockhart, who confused the markets somewhat. While pointing out that the FOMC could decide as early as at the forthcoming meeting in December to taper the bond purchases, he also argued for postponing the decision. However, Mr. Lockhart is currently not a voting member of the FOMC. He only pointed out that there is a possibility for a tapering decision next month. But the likelihood for this decision being made is rather small. As he provided arguments for delaying tapering further into next year, which were supported by another regional Fed president, there appears to be currently no majority for tapering within the FOMC. The negative reaction to mentioning just the possibility of deciding to taper in December demonstrates how irrational financial and commodity markets sometimes react.

Various empirical studies point to a high drug abuse in financial centers. And many traders and investors must have been on drugs to fear that Janet Yellen might suddenly change her mind during the Senate hearing for her appointment as first Fed chairwoman following Ben Bernanke in February next year. Mrs. Yellen is one of the architects of the current quantitative easing and the forward guidance provided by the FOMC. She always voted in line with Mr. Bernanke. Thus, it was irrational to fear that she would indicate that under her presidency the Fed would make an abrupt shift in monetary policy. She stands for continuity in the Fed policy. But only after the release of her written statement to the Senate, the markets got more relaxed and stock markets reached new record highs for the Dow and S&P 500 index. However, the precious metals could not benefit from this development.

This week, the World Gold Council released its quarterly report on Gold Demand Trends for Q3. The demand for bars and coins declined from 531.3 tons in Q2 to 304.2 tons. The dis-investment in ETFs continued albeit at a slower pace by -118.7 tons after -402.2 tons in the preceding quarter. Thus, it was not only “paper gold” but also physical gold demand, which disappointed. Nevertheless, total net demand of this two major groups increased by 43.7% from 129.1 to 185.5 tons in the third quarter. But this was not enough to push the price of gold above technical resistance.

That dis-investment in gold ETFs continued was already quite obvious by following the gold holdings of the SPDR Gold Trust ETF. However, one could only speculate who was the driving force behind the selling. As John Paulson’s hedge funds are a major stake holder and have suffered huge losses, they appeared as a potential candidate liquidating holdings to fund redemptions to disappointed investors. However, the recent SEC data surprised by showing that Mr. Paulson kept his stake nearly unchanged. It were other big investors who reduced their stake considerably. Especially PIMCO was mentioned in reports. The so-called king of bonds Bill Gross got some trends in fixed income markets wrong this year. Thus, PIMCO and in particular its flagship total return bond funds suffered massive outflows for several months in a row. Therefore, our speculation that liquidation of positions to meet fund withdrawals from investors was right, but it was just another whale. Nevertheless, big funds could drive a market rapidly higher but if they liquidate positions, the drop might be far steeper.

 For several weeks, the CFTC report on the “Commitment of Traders” was not available. Not only had the delayed releases showed some surprises. Also the recent CoT report brought a surprise for gold. After the dismal performance of gold, it had to be expected that large speculators reduced their net long position in the Comex gold futures. However, in the week ending November 12, the non-commercials reduced the long positions by 4,969 to 144,062 contracts and increased the short position by 24,815 to 82,710 contracts, an increase of 42.9% within one week. Thus, the net long position dropped from 91,136 to 61,352 contracts, the lowest level since mid-September this year. As hedge funds and CTAs are rather flexible in changing their positions, it would be rather dangerous to regard this development as a new trend. Nevertheless, it sends the message that large speculators got more pessimistic on the outlook for gold.

Precious metals performed dismal despite more indications that the Fed will not taper this year and the affirmation by Mrs. Janet Yellen that she would pursue an unchanged course of monetary policy. Holdings of the SPDR Gold Trust ETF falling further and large speculators cut the net-long positions in gold and silver. This all is a clear warning that the risk for precious metals is currently more biased to the down- than to the up-side.