The state of metals: July 2016

An insight into how metals have performed the year to date, and how they move in the year ahead from Pallion Group and ABC Bullion general manager Nicholas Frappell.

GOLD

July saw a continuation of strength in the price, although the price did decline from the highs in USD terms of US$1375, weakening through the middle of the month before a decent close some US$25 above the open of the month.

The tone for gold was helped by comments the previous month by James Bullard, the president of the St. Louis branch of the Fed, who outlined a regime of low US growth that economy with low growth, low productivity, and low real rates of return that strongly suggest that only one more rate rise is necessary between now and the end of 2017.

Gold’s strength at the end of the period came as the US Dollar Index dropped sharply. The index made a local high of 97.463 just after the middle of the month, hitting resistance at the top of the weekly Ichimoku cloud, before finishing the month lower at 95.53. Gold seemed to benefit somewhat from the weakness in the Yuan that manifested itself more or less from the middle of the month.

During the month, UMich sentiment remained weaker than expected, at 89.50 instead of the survey expectations of 93.50. The Philadelphia Fed business outlook survey came in at -2.90 instead of the expected 4.50, and Durable goods ex-transportation fell by 0.50 a per cent, and -4 per cent when transportation was included, both below expectations of 0.30 per cent and -1.40 per cent respectively.

Positioning-wise, gold experienced a slight outflow based on observations of the CME Managed Money category, which declined by almost 1.40 million Ftoz during the month. The decline was caused almost equally by long liquidation of approximately 700,000 Ftoz and short selling of around 650,000 Ftoz. (This stands in stark contrast with the almost 2 million Ftoz of short-covering that took place in June.)

Global gold ETFs grew by 1.56 million Ftoz during the month, or about 2.50 per cent. Reports of ongoing Japanese investor demand continue after the first half of the year recorded a 62 per cent rise of the same period in 2015.

The long term technical aspect looks positive, with point and figure price targets to US$1425 and US$1740, however one caveat is that a look at the Ichimoku cloud charts reveals that the Monthly cloud base looms overhead at US$1388 and that area around US$1380-1400 should prove resistive at the first attempt. Longer term supports come in at US$1288 and US$1235 and the trend remains positive.

Gold spot 240 minute chart July 2016

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SILVER

Silver followed a similar path to gold during the month, closing at US$19.70. The price started to consolidate during the month and the question is whether this is a mid-rally ‘flag’ where the price consolidates before resuming the uptrend, or not? So far the signals are mixed.

In terms of relative performance to gold, silver faced considerable resistance around 65.80, and a retreat to 70-72 looks likely, perhaps unsurprisingly considering the size of the positioning?

Positioning saw almost 83 million Tozs of additional speculative buying from the CME Managed Money category. By the last CFTC date on the 26th of July, speculative length was as high as it has ever been at 520.74 million Tozs in Managed Money, or 618 million Tozs in the slightly wider ‘Non Commercials’ definition. The volume-weighted average price during July on the CME was about US$20.03, so the recent longs will feel vulnerable as the price weakens off, although gross longs have lightened up by about 14 million Tozs in the first fortnight of August.

Global silver ETFs grew by 10.457 million Tozs during July, slightly under 2 per cent overall.

Silver is still bullish in the medium term, however positioning looks over-extended basis the increase in silver positioning during July. The price action during July does suggest a significant risk of a move lower below US$19.25, perhaps extending into the US$17.50 levels briefly? Certainly the cautionary note in last month’s report remains valid.

Silver spot 240 minute bar chart for July 2016

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PLATINUM

Platinum had a tremendous month, opening at US$1022.75, and closing almost 126 US dollars higher at US$1148.60, having touched a high of almost US$1159. This was a 13.3 % move to the high, and in doing so, the metal managed to retrace 50 per cent of the move from the high of July 2014 to the low of January 2016, a significant development. It seems extraordinary that platinum touched US$810 earlier this year. The onward rally partly reflects the ongoing strengthening of the South African Rand, which dipped to 13.87 by the end of the month, with SA producers receiving about 20 per cent uplift in the local platinum price relative to USD speculators, who have enjoyed a gain of 40 per cent from the lows of the year.

Figures released mid-July showed that EU car sales rose 6.90 per cent year on year, with 1.46 million units sold. This is the 34th consecutive month of growth in a region that favours Diesel and therefore higher platinum loadings. Commercial vehicle registrations rose by 13.30 per cent in June, the 18th consecutive month of growth, with a total of 223,591 units sold.

Chinese auto demand grew by 19 per cent to 1.70 million units during the preceding month, reinforcing the perception of a decent demand environment.

Positioning reveals that CME Managed Money sector added almost a million Tozs during July, in a clear vote for the decent fundamentals underlying the metal. By contrast, short covering in the Managed money sector contributed about 200,000 Tozs to the overall buying during the month. Longs in July challenged levels last seen in July 2014, when prices were at US$1500.

The volume weighted average through the month stood at approximately US$1096.

Global platinum ETFs declined by 43,000 Tozs. This might reflect some profit taking from purchases made in May.

Technically, platinum has support at US$1075, the Weekly Turning Line, with resistance at US$1245, the 61.80 per cent retracement of the June 2014-January 2016 move. The upside target on log point and figure to US$1181 has been reached during August, and the remaining upside targets focus on US$1292 and US$1358. Meanwhile, look for moves to US$1090 and possibly US$1064 within a rising market.

Platinum spot 240 minute chart for July 2016

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PALLADIUM

Palladium started the month below a very long term trend line extending back to the highs of September 2014. A succession of powerful moves higher saw the price break through the 50 per cent retracement of the whole down move from that US$912 level down to US$451, a striking performance considering how the previous month’s interaction with the trend line support had looked so in danger for a while. This was the month which came good on the comment made for the April edition. “Technical aspects of palladium suggest that a move to US$678 ‘could’ unfold in the longer term, with support at US$585, however the macro picture is still one of lower highs and lower lows, with traders trying to capture moves within an overall downtrend.” (early May ’16.) Of course, the price moved well below that mooted support level in the subsequent month…

Position-wise, CME Managed Money longs added 820,000 Tozs between the end of June and the 2nd of August, with almost 250,000 Tozs added during the week between the 26th June and Tuesday the 2nd of August. This represents a doubling of commitments by the longs. What of the short speculators? They had added 45,000 Tozs during the course of June, including their purchase of 168,000 Tozs in the final week of the month. In July, they carried on short-covering, buying 385,000 Tozs to take total shorts to 150,000 Tozs. You would have to go back to before January of last year to see such limited short positioning. The message is that at these price levels, shorts have plenty of capacity to re-build their positions. The 25-week Moving Average of Managed Money short position is currently 485,300 Tozs, for example.

The volume weighted average price for CME Palladium was US$651 during July.

Global Palladium ETFs stood at 2.199 million Tozs by the end of July, a decline of about half a tonne during the course of the month.

Technically, the price looked very positive up until the end of the month, although subsequent price action warns of a possible move to US$623. Above US$670, positive price targets favour moves up to US$737 and US$748, with US$771 a possibility. The option pricer indicates that there is an approximately one in five chance of the price reaching or exceeding that price in one month, to put that into context.

The platinum group metals have both seen an inflow of money during July, having been somewhat overlooked in the first half of the year, with static or declining long positioning when gold and silver saw interest almost from the start of 2016. Partly this may reflect improved relative valuations, and possibly a  more nuanced bet that if economic conditions do improve, platinum and palladium may yet rally relative to gold and silver.

Palladium spot 240 minute chart for July 2016

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