Silver follows the lead of gold

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

Silver

Silver started the quarter with a vertiginous plunge to 2017 lows, finding support at $US15.18, and creating a third touch that allows a trend line to be constructed from the December-January 2016 lows.

The market naturally followed gold higher, but despite a decent effort, failed to close above the Weekly Ichimoku Cloud, before turning around and retracing almost 50 per cent of the price rally from the July low.

The market found support in the vicinity of the Weekly Standard Line, which lies at $US16.92. The influences on silver remain largely the same as gold, however, it is worth noting that the sharp decline in the price of copper over the last three weeks has doubtless added to the swift drop in silver prices.

With silver under-performing gold and moving from the 74-75 ratio to 76.50, targets suggested that the gold-silver ratio will move towards the 78-79 levels seen in July of this year.

Silver Eagle sales, taken as a proxy for silver coin demand worldwide, are 15.70 million troy ounces (Tozs) this year. The same point in 2016 showed 30.16 million Tozs of sales and in 2015, 35.02 million coins sold.

The third quarter saw a dramatic increase in silver managed money gross longs, which were 298.98 million on July 4, rising to a maximum for the quarter of 410.22 million at the September 12 data point, before easing to 347.615 million by September 26.

Managed Money shorts put about 67 million Tozs of selling on in the first few weeks of July, but then declined dramatically over the remainder of the quarter.

In aggregate, shorts purchased 263.26 million Tozs between July 4 and September 12, taking short positioning down to the lowest level since February 2013, when silver had been chased up to $US31 and higher.

Overall, the combined effect was to take net positioning from a very low 5.83 million Tozs on July 4 to 380.33 million Tozs by September 2, an uplift of almost 375 million Tozs.

Silver ETF positions started the quarter at 667.257 million Tozs, grew to a maximum within the quarter of 682.10 million Tozs, and then declined to the end of September to 651.78 million Tozs, as ETF buyers caught some of the dip and then appeared to trim their holdings.

Platinum

Platinum and the South African Rand (ZAR) have been ranging for much of the quarter, with support consistent below $US900 per Toz, and selling pressure above $US1000.

Jacob Zuma managed to win a no-confidence vote in mid-August, the sixth such vote yet. Although President until 2019, his term as ANC leader ends in December, and the contest to see his rival Cyril Ramaphosa installed instead of Zuma’s ex-wife is already a key focus.

If Ramaphosa does win, expect a stronger ZAR, and the possibility of a recovery in platinum, assuming Ramaphosa can show quick signs of dispensing with the ANC’s ‘party of liberation’ approach to South Africa’s economy.

Managed Money length on the CME has increased over the quarter, from 1.076 million Tozs on July 4, peaking at 1.86 million Tozs on September 12, before dropping to 1.108 million Tozs by the end of September.

The growth in Managed money shorts seen in the previous quarter continued, although not as rapidly, reaching a peak of 1.778 million on July 11, before a sudden reduction that peaked on August 8, by which time around 837,000 Tozs had been re-purchased as shorts that added heavily through June and very early July got squeezed.

The impact resulted in a shift in net positions from short -0.599 million on July 4 to long 0.380 million by September 26.

The implication is a return to the $US900 level in the medium-term although there are signs of basing activity that could lead to a minor rally if the price holds above $US925. Positioning is still fairly long, and shorts are muted, so the scope for some aggressive selling is certainly there.

Palladium

After the massive spike in early June, palladium returned to support at the Weekly Turning Line through July and early August before rallying hard at the end of August, forming a sort of inverted hammer pattern on the daily candles, and then entering a pronounced decline through September.

The September monthly ‘candle’ formed a ‘Rickshaw’ man candle, which denotes a reversal signal. Palladium bulls should be cautious after the exuberance of the last 18 months. The candle was formed on decent monthly volume as well – not the highest of the year so far, but close.

Yes, Chinese imports did surge, but no, 79,000 Tozs doesn’t quite do it for the month of August. There are signs that the palladium Sept-Dec spread on CME tightened again, to about $US6 from flattish looking at the end of August, but not to the $US20 levels seen momentarily on June 9. The spread has eased noticeably since September 15 and with it the price.

Managed money gross longs declined slightly through the quarter, but averaged 2.483 million Tozs.  Managed Money shorts declined from 0.20 million short to 0.08 million Tozs short, leaving net positioning down to 2.152 million Tozs long by September 26.

Shorter-term targets suggest a rally to $US942 then a return to $US852. Very long term targets are indicated in the daily point and figure slide below.

Auto sales in Europe continue to grow, with sales up 4.50 per cent in the first eight months of 2017, taking EU sales to 9.79 million passenger cars. (ACEA) August sales figure were up 5.6 per cent to 0.865 million units.

Auto sales in America weakened sharply with seasonally-adjusted annual sales at the end of August of 16.03 million units, compared with 17.13 million units in August 2016.

Net demand for palladium in North American auto catalysts outweighs that for platinum by around 11 to 1, with net demand (gross demand minus scrap recycling) estimated at 820,000 Tozs for Pd in North America compared with around 74,000 Tozs for platinum basis demand figures for 2016 by Johnson Matthey, so weaker demand in the US should impact on palladium relatively more than on platinum.

Trying to make sense of palladium’s long term targets…this daily log chart which covers the period from May 2010 onwards has certainly captured the downside targets that were achieved in 2016.

Those downside targets were probably met with general scepticism when they were generated in October 2014 and April 2015. Will it be as accurate going forward?

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