Precious metals confront challenging second quarter market conditions

Nicholas Frappell reviews the market performance of the precious metals sector in the June quarter in the second part of ABC Bullion’s review of the three-month period.

Read part one on gold


Silver retreated during the second quarter to the long-term trend line support that extends back to December 2015.

In May, the market bounced sharply higher from the low of $US16.06 made at this line, but topped out at technical resistance at $US17.39.

June saw the market weaken back to the rising trend line support, but with a weaker close at $US16.63. Overall, silver weakened relative to gold through the period, with the ratio opening at around 68 at the end of March, and finishing June at 74.67, from where it has weakened even further since.

This tends to cast a bearish pall over the gold and silver complex overall.

There has been a notable reduction in investor demand via silver coins, not only in the last quarter but basis demand for US silver Eagles, through 2017.

At June 30, annual demand for Eagles was down over 14 million Tozs compared with the same point in 2016. That weakness in demand appears to be shared equally over both the first and second quarters of 2017.

April witnessed a sharp increase in managed money gross longs on the CME, as positions rose from 465 million Tozs on March 28 to 571.25 million Tozs on April 11 – a 106 million Toz increase in a fortnight at a volume weighted average price (VWAT) of $US18.19.

The next six weeks saw a substantial liquidation of 228 million Tozs of gross length to take positioning down to 342.39 million Tozs, initially at similar levels to where the longs entered, and then at much lower levels, at $US16.42 and $US16.90.

Meanwhile, Managed Money shorts increased their bets aggressively, with gross shorts increasing from 59.15 million Tozs on March 28 to 255 million Tozs short by mid-May, before swinging down to 140.84 million Tozs and back up to an even larger 263 million Tozs by the most recent reporting date, June 27.

The most recent build-up took place at successive VWAPs of $US16.77 and $US16.54, and so far, price action is very much going their way.

The change in open interest on the September contract suggests that further short-selling took place in the last week of the month, possible in the region of an additional 40 million Tozs, although that amount does hinge on how many longs reduced their holdings over the same period.

If there was decent long liquidation, which you might expect given the worsening price behaviour, then short positioning could be even larger.

Overall, the outlook remains fairly negative basis the inability of silver to break up through higher technical resistance levels at $US18.50 in mid-April.

Subsequently, the price has taken out the May 2017 low and this exposes the December 2016 low of $US15.63 as a key support.


Platinum continued to exhibit weak price action despite a slight strengthening of the South African Rand in the middle phase of the quarter.

Initially, the Rand weakened sharply after Jacob Zuma fired respected Finance Minister Pravin Gordhan, strengthening after perceptions changed to Zuma being forced to step down by the ANC.

The period now ends with the ANC calling for the ‘nationalisation’ of the South African Reserve Bank, the nations’ central bank, and furthermore to expropriate land without compensation, which has sent the ZAR reeling and pushed platinum lower.

Managed Money length on the CME increased slightly over the quarter, from 985,000 Tozs on March 28 to 1.147 million at June 27.

Managed Money shorts exploded to the highest levels seen since the Managed Money category was started, reaching 1,650,450 Tozs on May 9, growing from 577,200 Tozs at the end of the preceding quarter.


Palladium was already trending strongly in the first quarter, with investors getting very long. The market bumped up against the top of the trend channel during the last week of April, and as you might expect, then fell away towards the middle of the channel, finding support at the Weekly Standard Line on the Ichimoku chart, close to the $US748 level mentioned in the previous quarterly report.

The price then turned around and tore higher, break up through the top of the trend channel and touching $US928 before cycling lower again very rapidly.

This was a 13 per cent rally in nine days, and reflected a sudden tightening in the forward curve, with the NYMEX September-December futures spread going from a $US1.05 contango (December trading at a premium to September) at the end of March, to about a dollar backwardation at the end of May, and then into an eye-watering $US25 backwardation by June 9.

OTC swap rates implied a borrowing cost of around 21-22 per cent for one week out to one month. To be honest, it’s a bit hard to figure out what precipitated the whole event from here, as it is not obvious that anyone stacked on a big September-December spread in NYMEX, judging by the evolution of open interest in each contract.

PGMS and auto sales

Auto sales in Europe continue to grow, with sales up 5.3 per cent in the first five months of 2017. May sales figures were up 7.6 per cent to 1.386 million units.

Auto sales in America weakened somewhat with seasonally-adjusted annual sales at the end of June standing at 16.41 million units, compared with 16.69 million units in June 2016.

There is increased awareness of poor-quality auto loans in the US market, and the long trend of improved consumption since the financial crisis appears to be stuttering.

House prices continue to grow, and employment data is strong, so it is hard to attribute wealth effects to the decline in auto sales in the US.

Nicholas Frappell is general manager at ABC Bullion

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