Market Report: End of month sell-off

Taking advantage of low volumes and volatility, the bullion banks have been able to close more of their shorts in gold and silver.

By early European trading this morning (Friday) gold fell by a net $8 to $1312 over the week, and silver was virtually unchanged at $18.86. There was a little more volatility than these numbers suggest, but on the whole it has been a quiet week for precious metals.

The next chart shows how open interest has contracted for gold since the record level of 657,776 contracts on 11 July. On Wednesday Open Interest was 554,729, down 103,047 contracts from the record high seven weeks ago.

Note the good correlation between open interest and the price, which has been a feature of this year’s bull market. However, the price has marginally outperformed open interest, holding up reasonably well. This was confirmed in intraday trading, when attempts by the bears to bash the price appear to have been halted by solid buying on the dips. It is the character of this buying, patient accumulation, which imparts a bullish undertone to the market.

There was another large exchange-for-physical in Comex gold on Wednesday for the second week running, this time for nearly 11,000 contracts, the equivalent of 34.2 tonnes. This marries up with a large sale that day, which drove gold down to $1305, before a modest recovery of $5. Being the last day of the month, an attempt by a large bullion bank to show a favourable valuation for its short position was suspected, but the exchange for physical tells us it may have been related to a purchase of physical gold.

Later today, markets will focus on the payroll number for August, which is expected to be up about 180,000. August has been a fickle month historically, reflecting lower than expected outturns. It is not clear whether this is discounted in the consensus expectation.

If it turns out to be over 200,000, the odds of a September rate rise should increase, to the detriment of precious metal prices. If the Fed Funds Rate is raised in September, at least it will be out of the way, and it is worth remembering that gold and silver were depressed ahead of the last increase in December 2015, rising strongly subsequently.

In my opinion, the Fed should act quickly to head off price inflation, which is showing early signs of becoming the most important issue, signs by the way which are being ignored. But it is not that easy, because the other three major central banks are following unprecedented degrees of monetary expansion. If the Fed increased the FFR, the currency and financial strains around the world would increase significantly. In an article published yesterday, I argue that the Fed could raise the FFR if at the same time it announced discretionary QE, to bring monetary policy in line with those of the other major central banks, and recognising the need to stimulate an underperforming US economy.

Further QE is not expected, but it could lead to a much more bullish background for gold and silver, on the basis that the rise would be out of the way, and monetary policy would be signalled as still accommodating.

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