The state of metals: June 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

June was an extraordinary month for gold, thanks to a combination of factors, the most memorable of all being the narrow choice by the UK electorate to leave the European Union, that most divisive of issues in British politics. As the votes were counted and the reality that the leavers were in the ascendant sank in, gold started to fly, with the price hurtling US$41 higher in one hour. Meanwhile bond yields were crushed with US and Australian 10 year bonds dropping 30 basis points, and both the GBP and the EUR plunged. The immediate resignation of the UK Prime Minister, David Cameron and the ensuing political uncertainty helped gold to the highest monthly close since June 2014.

In Australian dollar terms, the price made a historic high of $1846. (The previous high had been made in the week ending the 26th of August 2011, when gold made a high of $1839, or US$1912, with the AUD at the 1.04 levels back then. )

Even without the UK referendum result, it is possible that June would have been a very strong month for gold. The week ending June the 3rd saw the worst Non-Farm Payrolls since 2010, with only 38,000 jobs created. The weakness seen in the preceding month was quickly reversed, and the first half of the month saw US Treasury yields fall to a low of 1.57  per cent before recovering in the latter half. Comments by Federal Reserve chair Janet Yellen were fairly lukewarm about the pace of future rises even before the ‘Brexit’ vote. The month ended with poor Core and non-Core durable goods figures., with CDG at -0.30  per cent instead of an expected 0.10 per cent and Durable Goods down -2.20 per cent versus an expected decline of 0.50 per cent.

In all, a month which saw perceptions of the pace of interest rate rises decline as Fed-watchers examined the ‘dot-plots’ and inferred that two interest rate rises where planned in 2016, as against the four that were expected when the Fed lifted rates in mid-December 2015. Put another way, on the 18th of May, the market priced an implied probability of 40 per cent that Fed funds would be in the 0.50-0.75 target range in January 2017. By the last day of the month, that had slid to nine per cent.

In fact, by the end of June, expectations that Fed funds would be exactly where they are in 18 months’ time (December 2017) were rated at just over 50 per cent.

In terms of positioning, June saw speculative length on COMEX rise by 9.80 million Ftoz, basis the non-commercial futures only category. Shorts reduced by 0.625 million Ftoz, however that disguises a small increase in short selling right at the end of the month. In any case, net positioning on the CME Comex gold contract rose by 10.40 million Tozs during the month, taking the growth of CME futures net length since the end of last year to 28.29 million Ftoz, an all-time high. This means that June inflows completely reversed the 7.50 million Ftoz sell-off in net futures length seen in May, and then headed longer still.

Global ETF positioning rose by 3.386 million Ftoz during the month, finishing the month at 62.78 million Tozs.

Technically, gold approached a trend line support and the top of the weekly cloud but commenced the rally before interacting with either of those. The price spike at the very end broke up through a down trend in the daily point and figure that extended back to 2013, and subsequently, price targets to US$1425 look more achievable than they did at the beginning of the month.

Gold spot 240 minute chart June 2016

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Silver

Silver outdid May for absolute strength, although not for the overall range, with the market opening at closing the month US$2.72 higher than the open, a 17.00 % rally. Silver out-performed gold again, with the ratio moving from around 76 to a month-end close of 70.60. The powerful break of the gold-silver ratio that took place in April, which ended the half-decade of relative underperformance of silver, was followed by a test of that break out in May, and then saw a dramatic move last month.

In Australian dollar terms, the price rallied 13.60  per cent, from $22.11 to close the month at $25.12, very close to the high of $25.25. The price actually closed right on the Monthly cloud base, although has not hesitated to penetrate that resistance area in the following month.

What is notable is that silver generally outperforms gold when gold is in a strong bull market, and vice-versa, so silver’s behaviour could be taken as further confirmation of the breakout in gold during the first quarter and the onset of a longer-lasting uptrend in gold.

Silver saw around 97 million Tozs of fresh managed money sector buying. Managed money shorts bought back 45.54 million Tozs, making a total of 143 million Tozs net. The Volume-weighted-average price through June was US$17.57 The month started with a continuation of the liquidation that marked May’s trading, and then the period between the 7th and the 21st saw almost 98 million of metal flow. The week of the ‘Brexit’ referendum actually saw a slight outflow.

Overseas, the market heard reports of significant buying from China towards the end of the month.

Global ETFs saw 4.355 million Tozs of buying throughout June.

Technically, the next major resistance is US$22.18, followed by US$23.80, the base of the rarely-followed Monthly cloud. Point and figure charts point towards US$22.08 and US$24.63. A move below US$19.20 could open the way for a retreat to US$18.64 and US$17.04, and given that silver can fall like a knife when significant selling arises, combined with the highest-ever managed money long position, at 450.15 million Tozs, non-commercial longs at 556.74 million Tozs, and managed money net positioning almost 13 times higher than it was at the end of December 2015, it would be prudent to remember past bull market corrections.

Now, while the ‘price’ of options in volatility terms for August CME silver options has increased pretty much across the board as you would expect given the big moves seen in the latter half of the month, what you can see is that the market has bid up the price of puts as of today relative to calls of a similar delta compared with early June, and that suggest not so much that people are more bearish, but that some might be buying downside protection in the event that the market has a notable correction.

Silver spot 240 minute bar chart for June 2016

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Platinum

Platinum opened the month at US$979.40 (spot) and closed at US$1024.40, less than five dollars away from the US$1029.30 high, a rally of 4.56  per cent. Platinum rallied from just above the Weekly Standard line (also the Monthly Turning Line…) which has been a support level since late February, when the line was back down at US$920 levels. Now the line has moved to a rather distant US$958…In effect, platinum ranged until the final week of the month when it broke slightly higher.

The net positioning on the CME platinum futures declined fairly steadily from 902,350 Tozs to 676,800 Tozs through the month.  In detail, managed money shorts extended their positions by 38,000 Tozs and then 68,000 Tozs in the first and second weeks of the month, a total of 106,000 Tozs of fresh short selling, and then bought back 43,000 Tozs in the latter half of the month. Managed money longs spent the second half of the month selling aggressively, liquidating a total of 169,000 Tozs at a VWAP of around US$982. By the end of the month, managed money length was reduced to about 107,000 less than the last CFTC report in 2015, the 29th of December, meaning all the managed money inflows seen since the start of the year have disappeared.

(Actually, this was effectively the last phase of the liquidation of growth in 462,000 of fresh longs acquired during the April to mid-May period at a VWAP of around US$1038…)

Global ETFs saw a rise of about 10,000 Tozs by the end of June, after the market gained about 25,000 Tozs by mid-month prior to some liquidation. From the evidence so far, investors were not persuaded that platinum has a strong outlook.

Technically, platinum displayed some medium-term strength during the month. Twice it found support at the US$960 level, which was both the Weekly Standard Line and the 50 per cent retracement of the move from the late January lows to the early May high. The second time the price held the price rallied strongly.  The ‘Brexit’ vote might have knocked some markets, but platinum was able to gain comfortably.

The basing and consolidating activity seen above the June lows created upside price targets to US$1085 and US$1097, and these have already been reached at the time of writing. (13th July)

Figures released by the ACEA on the 16th of June continued to underline the decent growth in EU passenger car registrations. May 2016 saw the 33rd consecutive month of growth, with monthly growth of 16 per cent compared with May 2015, and year-to-date growth of 9.90 per cent. 1,288,220 vehicles were sold and the growth was broad-based across all EU markets, although relatively modest in the UK. The ACEA is now forecasting 5 % growth in passenger vehicle registrations in 2016.

Commercial and heavy-duty vehicles grew by 16.40  per cent in May compared with May 2015, and grew by 12.80 % in the first five months of the year. This was the 17th consecutive month of growth, with 187,134 units sold. Light (≤ 3.520 Mt) and heavy commercial vehicles (>16 Mt) grew the most, at 17.70 % and 11.70 % respectively.

(These vehicles will be platinum-intensive in terms of catalyst loadings.)

Platinum spot 240 minute chart for June 2016

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Palladium

Palladium opened at US$547, dipped, then rallied strongly to close the month at US$600, up 9.70 per cent. For a moment, the middle to latter part of June looked like the onset of another phase of weakness for palladium, with the price set to test US$500, but after a week where the price flirted with the wide expanse below the trend line support, the price exploded higher, with the final week of the month seeing an almost 10 per cent gain.

June saw just over 10,000 Tozs in long liquidation as the price come under pressure, barely a one per cent decline in total managed money length. Shorts added another 213,000 Tozs of selling in the first three weeks of June, taking gross managed money shorts to 756,400 Tozs, but then started to cover, buying 168,000 Tozs in the final week of the month, and being the prime mover behind the strong closing phase. This aspect of June’s price performance is arguably negative, as the 376,000 Tozs increase in short positioning seen from the middle of May to the June peak has now been reduced by almost half – and reduced yet further in the first week of July.

Global ETF positions grew steadily by almost a tonne during June, a fairly meagre 1.40 %.

In April and May the monthly report stated that US$520 was the critical price point to hold in order to maintain the possibility of a bullish resolution, possibly to US$678: in late May and mid-June that price level held, with the price making a low of US$528. With the price closing at US$600, and rallying since, that US$678 outcome seems reasonable, and additional price targets made at the end of the month suggest US$695 as well.

The key resistance levels are US$620-626 where a very long term downtrend from the September 2014 high comes into play, and the 38.20 retracement of the entire US$912 to US$452 down move comes into play, almost within a few dollars of each other. A close on the weekly above those levels would be positive, however the caveat that recent buying is all about short speculators rushing to buy back needs repeating.

Palladium spot 240 minute chart for June 2016

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