The sell-off in precious metals gathered pace this week into what is often called capitulation. Money-managers (hedge funds) cut their long gold positions on Comex by 19,044 contracts in the week to Tuesday, March 26. This was the biggest single factor in the fall in open interest, which continued for the rest of that week. Open interest is shown in the chart below.
Since Tuesday, despite the slide in the gold price, open interest has picked up indicating that there is buying support at these levels. Japanese money-printing at unprecedented rates should turn out to be a major bull factor; however signs that the U.S. and Eurozone economies are slipping back into recession has undermined energy and metal prices generally, giving a fig-leaf of justification for marking down precious metals.
To summarise, the bullion banks are still closing their short positions in gold, the extent of which will be revealed in the Bank Participation Report due this evening.
Silver is very different as the chart below illustrates.
Open interest has been climbing to close at nearly record levels despite the fall in the price, and the futures market has seen big volumes on falling prices. The attempt to smash the price has not dislodged the longs, despite unusually large hedge fund shorts at over 22,000 contracts. This is ultimately bullish behaviour, backed up by strong physical demand for silver eagles and ETFs.
Predicting the time and price for the bottom of gold and silver prices is a mug’s game, but signs of an uptick in open interest on falling gold prices suggests that downside is now limited by new buyers. However, there are very large players on both sides of the market, less interested in fundamentals than turning a profit; therefore emotion rather than reason is the dominant short-term factor. Do not be surprised, if prices fall further, or to hear rumours of forced selling of gold by governments, such as Spain or Italy. Against that there is likely to be accelerating demand from liquidation of bank deposits in Europe, and Japanese institutions hedging a falling yen.
It is a quiet week for announcements, with the emphasis on Friday.
Monday: Nothing of importance expected.
Tuesday: U.K. Industrial Production (-3.5% y/y) and trade balance (£-8.6bn). U.S. Wholesale Inventories (up 0.5%).
Wednesday: U.S. Budget deficit, Minutes of Fed’s March meeting released.
Thursday: U.S. Import Price Index and Initial Claims.
Friday: Eurozone Industrial Production, U.S. Producer Price Index, Retail Sales and Business Inventories.