Market Report: $1.4bn gold take-down

Aug 26 AM

Precious metal prices traded lower this week in lacklustre trading, until Wednesday, when someone sold 10,000 gold contracts on Comex.

Before that event, the silver price had been hit hard, though Open Interest remained stubbornly high. Gold fell $14 to $1324.5 over the week by early European trade this morning, and silver from $19.30 to $18.63.

It is possible that the 10,000 gold contract sale and the price action in gold and silver was connected with option expirations on Thursday. In silver, the target would have been to make the $19 calls expire worthless, while in gold the target was probably as low as $1300.

In gold’s case, there were some 13,000 September call options with striking prices between $1300 and $1340. Last Friday, the gold price closed at $1342, so there is no doubt there was a huge incentive for the grantors to manage prices lower to a sub-$1300 target. As it was, they only managed to get the price down to $1320, so for the professional shorts the cost on about 8,000 option contracts was saved. Silver was a similar story, but the numbers were far smaller. Nonetheless, the price has fallen over $1.30 over the last ten days trading.

However, there was another interesting development last night. An exceptionally high 20,966 Comex December contracts were exchanged for physical (EFP). EFP transactions happen all the time, but this was a jumbo deal. We don’t know the reason, which is most probably technical, but it could be linked to the sale of 10,000 contracts the day before. Most exchanges would automatically initiate an enquiry to ensure that there is no market rigging involved in a $2.8bn deal. Dream on.

Volumes, in common with contracts for other markets, have been seasonally low, which inevitably means that prices are easily moved, when not driven by technical issues such as option expirations. Later today (Friday) Janet Yellen will deliver her Jackson Hole speech, which has the effect of delivering pre-speech uncertainty into the market all week. The concern for precious metals, as always, is that she might hint more strongly of a rise in interest rates sooner rather than later.

The Fed is committed to two statistical targets, unemployment and price inflation. With the CPI approaching its 2% target and official unemployment numbers also at or close to the Fed’s target, official rates should be returning to normality. Perhaps we are seeing another target, the dollar exchange rate, actually being monitored, because a return to interest rate normality in the US at a time when the Bank of Japan and the European Central Bank are imposing negative rates, could have unexpected consequences. And here we need to remember that international business is highly dependent on dollar finance, but earnings are in other currencies.

Here at Goldmoney, our economic research clearly indicates that the Fed must prioritise higher interest rates if future price inflation is to be contained. However, it is not as simple as that, because the end of the bond bull market on its own will create a backwash out of the financial sector into consumption, simply because there is nowhere else for income allocation to go. We do not expect the Fed to be fully aware of this effect, but there is no doubt it is acutely aware of the possible consequences of the bursting of a bond market bubble.

It amounts to a wall of worry for gold bulls, which is at the same time the underlying reason why accelerating monetary inflation is guaranteed in the future.

Meanwhile, the price chart of gold reflects a continuing bullish set-up, which overrides short-term worries.

Aug 26 AM 2

The price has come back to test support at the 55-day moving average. Assuming it holds, for wanabe bulls this is a reasonable entry level.

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