Gold market remains buoyant after July rally

Nicholas Frappell reviews the market performance of gold and silver in July in ABC Bullion’s precious metals review for the month.

Gold started July with a pronounced downswing to test the $US1205 lows (basis spot), forming a hammer shaped candle on the daily chart that often signals a change in trend.

The precious metal then rallied to close the month on highs.

Its price topped out more or less on the major trend line resistance and at the base of the Monthly Cloud resistance, closing the month at $US1271.20.

Again, the price drop to around the Monthly Standard Line support and subsequent rally showed that gold is rejecting weakness where it can.

CME Managed Money gold futures net positioning grew by 4.58 million troy ounces (Toz) between the June 27 and August 1 reporting points, with buying predominantly coming from short covering in the second half of the month.

Shorts bought back 3.224 million Tozs, or 70 per cent of all buying seen in that period. The VWAP (volume weighted average price) on CME gold futures for the period was $US1267.

Gold ETFs declined by 2.175 million Ftozs from June 30 to July 31, to end at 66,328,568 Ftozs.

The metal’s strength was driven by a strong continuation of US dollar weakness, with the dollar index plunging to 93.152 by the end of July, after closing June at 95.628.

US economic data showed a decline in vehicle sales, construction spending, and May durable goods orders were down 0.8 per cent.

Retail sales (ex Autos) were negative (0.2 per cent) and UMich Expectations were soft at 80.00, compared with the anticipated 84.00.

On the plus side, housing starts and housing permits were both higher than anticipated, with housing starts up 8.30 per cent month on month.

On balance, data was sufficiently mixed to call into question the pace of tightening.

The probability of no change in rates at the September FOCM meeting rose from about 85 per cent at the beginning of July to around 95 per cent at the end of the month.

For the December meeting, that probability moved from around 50 per cent to just over 63 per cent, with Fed Governor Lael Brainard opining that the Fed could ‘act soon’ to run the balance sheet down – a flexible commitment if there ever was one – while saying that the Fed had ‘not much more’ to do in terms of rate rises.

Support levels came in around the Monthly Standard Line at $US1211, which the spot price breached for a moment, resistance around the closing level of the month, where both the trend-line and the monthly Ichimoku cloud loomed.

Silver

Silver formed a ‘hammer candle’ in July, with the price breaking down to $US15.89, before staging a strong recovery to close near the highs, at $US16.827, and narrowly above the monthly open of $US16.64 – this can be taken as a trend reversal signal after a period of price weakness dating from April.

CME Managed Money futures short positioning was 263.010 million Tozs on June 27, and increased by 66.555 million Tozs to 329.656 million Tozs by July 18, the maximum short position recorded since the Managed Money category was first created in 2006.

Net positioning declined to 35.43 million Tozs, the shortest net position since August 2015.

As often happens when net positioning reaches an extreme, the subsequent price reaction was decent, with silver rallying over a dollar as investors added 150.60 million Tozs to net positions over the next fortnight, mainly as shorts bought back 112.43 million Tozs.

CME Managed Money long positioning was nothing like as dramatic, and between June 27 and August 1, grew by just over 10 million Tozs, a move that concealed a dip to 278.49 million Tozs before recovering to 332.305 million Tozs at the beginning of August.

Global ETFs grew by just over 10 million Tozs to finish the month long 677.303 million Tozs.

In terms of relative performance, July was notable for a rapid change towards outperformance for silver, which is bullish for the complex in general.

Silver was helped by the beginnings of a strong rally in copper, which has a fairly decent correlation with silver of 0.533.