The state of metals: May 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 finished May at A$1680, down about A$21 on the opening spot price of the month, a decline of just over 1 %. This relatively stable performance was deceptive, as the ‘underlying’ US$ price of gold dropped US$78 over the course of May, a decline of slightly over 6 %. The Australian dollar’s move from 0.761 at the beginning of the month to 0.723 at the end provided the missing 4.99 % of assistance.

May saw a pronounced strengthening of the US Dollar index, an environment in which gold generally suffers. The Dollar index rose despite the slowest rate of job creation in America in over five years, with only 38,000 new jobs created. Unemployment numbers did look good, dropping to 4.70 %, a level consistent with thoughts of tightening monetary policy under most circumstances, however there are two caveats: May also saw a drop in the number of temporary workers employed – again – and also saw 458,000 people withdraw from the labour market, which flattered the Unemployment rate, but which again suggests an underlying weakness in the labour market of the world’s largest economy. Additionally, the month saw a weak Chicago PMI figure of 49.30, signalling contraction.

All the same, the perception that the Federal Reserve would raise rates persisted, helping a broad rally in the USD, and an increase in the latter half of the month of 10 year US Treasury yields to a monthly high of 1.89 %. Our assessment that the Dollar index would be capped around 94.50 in May was off by over 1 figure, as the month made a high of 95.968 before closing at 95.891, doubtless helped along by short-covering of around 1.046 US$ billion in the index futures.

Gold futures activity on the CME in New York was notable for a sharp reduction in gross managed money length as speculators liquidated holdings, which had grown to 24.88 million Ftoz by May the 3rd. A total of 5.67 million Ftoz of long liquidation took place on the CME contract by May the 31st. Managed money shorts grew by 1.36 million from a level of 2.995 million Ftoz, around the 2016 lows in terms of positioning. This took place at an approximate volume weighted average price of US$1262.00.

Essentially, speculative length had grown to outlandish levels on the back of optimism over gold’s likely future, which was tempered by the recovery in the USD, itself probably oversold in the first quarter of the year, and in turn, speculators betting on a decline in gold had retreated to levels associated with February of last year, before the big short-selling assault on the price that largely defined 2015. The overall decrease in net positioning that arose from the above figures would go on to help set the scene for price action in the following month…

Looking at CME data, average daily volume in gold futures was 280,006 contracts, up by 50.48 % over May 2015, with option turnover up by 45.69 %. Gold has definitely returned to centre stage in investor perceptions judging by the above numbers.

Gold ETFs saw inflows of 2.695 million Ftoz during May, compared with an outflow of 0.102 million Ftoz during April, suggesting that ETF investors were not unhappy with weaker prices.

Total ETF inflows between the end of December 2015 and the end of May were 12.261 million Ftoz with global ETF positioning  now back to levels seen at the beginning of November 2013, when gold was trading around the A$1400 level, or US$1300 level.

In technical terms, gold’s behaviour in May in US$ was notable for retracing about 38.20 % of the rally from the December 2015 lows, which is healthy, and in the process the price held the Standard line on the Monthly Ichimoku cloud. Quite rightly, some will point out that almost no-one looks at monthly charts; nonetheless, it was a noteworthy level to find support. On the weekly chart, the Lagging Span bounced off the base of the weekly cloud, which is also a positive sign in the context of a price decline during the month. More esoterically still, the pull back in the price allowed the Daily point and figure chart that we use for a very long term assessment of the gold price to create a fresh target in XAUUSD, to US$1740. (The probability of that outcome happening in the next year is obviously low, and estimated at slightly more than 1 in 20 basis the price levels at the close of the month.)

gold chart

Gold spot 4 hourly chart – May


After a very strong month in April – a month in which US$ silver saw the strongest monthly rally to the close since August 2013 – silver also headed lower during May. The decline from the open of US$17.87 to the close at US$16.00 was a 10.46 % drop, or A$23.48 to A$22.11, a decline of 5.83 % in A$ terms. Silver therefore underperformed relative to gold during May, weakening to a ratio of 76.55 on the 24th of May, retracing half of the tremendous strengthening move in the gold-silver ratio seen in mid-April.

On the CME, the first fortnight of the month saw significant inflows of speculative money, with almost 35 million Tozs of futures buying from the last COT (‘Commitment of Traders’) reporting date in April to the 10th of May, done at a volume weighted average (VWAP) of US$17.43, followed by an outflow of 68.46 million Tozs of long liquidation from the 10th of May onwards. This left gross speculative length at 353.39 million Tozs, compared with an average since February 2013 of 207.84 million.

Shorts sold 51.40 million Tozs from the 27th April to the 24th of May at a VWAP of US$17.20, then ended up buying back almost 11 million Tozs at a VWAP of US$16.25, to leave speculative short positioning at 83.805 million Tozs. The average size of the short position held since February 2013 has been 124 million Tozs.

This somewhat arbitrary sounding date reflects the beginning of the era of markedly heavier speculative betting against silver, and corresponds slightly less with the period from which a secular rise in speculative long positioning was experienced.

Global ETF positioning grew by 1.045 million Tozs during May, roughly an eighth of the buying seen in April.

From a chart perspective, April saw silver rally to close at putative resistance around the Monthly Standard line on the Ichimoku cloud chart – before collapsing in May to find support at the 50 % retracement of the entire rally from the December low, and right on trend line support on the first day of the following month.

Average daily volume on CME silver futures was 56,361 contracts (about 282 million Tozs) and this is an increase of 27.18 % over May 2015. CME options on silver futures saw a decrease of 6.80 % compared with May of last year, which is slightly surprising. It is the only metal contract listed on the CME to see a year-on-year decline in options volume.

silver chart

Silver spot 4 hourly chart for May



Platinum dropped from an open of US$1077.60 to close at US$979.40, a decline of 9.18 % during May, after a powerful start to the year with continuing positive news on auto and heavy duty Diesel sales in both Europe and America, coupled with expectations of continuing deficits providing a lift to the price. That rally came unstuck when the price rallied to close at technical resistance the previous month. The average discount to gold during the month stuck stubbornly close to the April levels, rising slightly to minus US$224.80.

The ACEA has released more data in the past month so here is a quick summary of the EU and other regions.

EU car registrations grew for the 33rd consecutive month in May, with 16 % year-on-year growth, hitting 1.288 million units. Growth in the first 5 months of 2016 is up 9.90 %.

EU Commercial vehicle data for April was released towards the end of May with an increase of 14.60 % in April, with 195,013 units sold. (This compares with 8 % growth in March, although total demand in March was for 242,049 units.)

In the US, auto sales have been steady, up 2.20 % year on year, with some emphasis on larger vehicles with commensurately higher catalyst loadings.

China has reported growth of 6.50 % in the first quarter and apparently SUVs are all the rage

On the negative side, Japanese auto sales were down by 8 % over the first quarter of the year, and South America saw car sales decline by almost 20 %, with economic difficulties in Brazil leading to a 26.60 % drop in registrations nationally.

Overall however, 285,000 more cars were registered worldwide in Q1 2016 than Q1 2015, and this is positive for PGM demand.

Average daily volume on the CME was 11,898 contracts, or almost 595,000 Tozs. This represents a 12.39 % increase over May 2015.

After growing by 357,100 Tozs in April at an approximate VWAP of US$999, managed money longs  grew by another 136,000 Tozs in the first half of May at a VWAP of US$1061, and then saw an outflow of 258,000 Tozs in the period 17th to 31st of May at a VWAP of US$1008.00. The second half of May saw about 140,000 Tozs of short selling from managed money speculators – a total of 330,000 Tozs of selling from that source in the space of a fortnight. By contrast, buying on the TOCOM futures in Japan saw a net of 72,000 Tozs of buying, as traders punted on Yen weakness.

Global ETFs saw very small outflows of about 2,000 Tozs during May.

Technically, platinum dropped back after hitting the 38.2 % Fibonacci retracement in April and failing to break up above the weekly ichimoku cloud. It made a low fairly close to the weekly Standard Line on the cloud chart, which should now be a medium term support (subsequently the market made a low on that line in June.) So perhaps the rally is merely corrective in the context of a very extended downtrend? The medium term fundamental outlook suggests higher but the technical outlook is more mixed now.

platinum chart

Platinum spot hourly chart


Palladium opened at US$629, the 38.20 % Fibonacci retracement of the massive down-move from the September 2014 high to the January 2016 low, and then spent four torrid weeks collapsing to US$523, near trend-line support, before closing at US$547.

CME Managed money longs remain more or less sidelined with very little activity during the month. Having defined April by buying back almost 307,000 Tozs to the 3rd of May, managed money shorts decided to grow their positions again, at a VWAP of around US$544.

Global ETFs diminished by 69,000 Tozs during May. Palladium is just not attracting investor interest on the long side.

Last month we wrote that “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.” Above US$520 the bullish element of that view more or less survives intact, however just based on May’s performance; the outlook for the upside looks less likely.

The auto demand picture can be found in the platinum section.

Average daily volume data on the CME palladium contract is telling. The average was up 3.60 % up on May 2015, with 6,790 contracts (679,000 Tozs). Average daily volume for all precious contracts in May was up 23.41 %, and up 34.47 % for Copper, making palladium look relatively unloved in the overall metals complex.

palladium chart

Palladium spot 4 hourly chart


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