Will gold and silver continue to fall or have they bottomed?

This week has seen somewhat reduced volatility in precious metals, with gold ranging between $1,442 and $1,480 and silver between $23.20 and $24.60. The question we would all like an answer to is having consolidated after the massive knock-down last month, will prices continue to fall, or have they bottomed?

To help answer this question, let’s look at the position of the bullion banks on Comex, in the form of the four largest traders. The two charts below are for gold and silver, and represent the balance between the gross long and gross short positions of the banks deemed to control the market.

The good news is that overall the four largest traders are now marginally long of gold. By scaring speculators into closing their longs and opening up short positions they have got out of jail.

The not so good is that they have managed to reduce their silver shorts, but they are still short 24,000 contracts, which is 120 million ounces. And since gold and silver tend to move in the same direction ideally they will want to keep a lid on the gold price while they shake out some more silver bulls. To judge their success we need to watch open interest closely over the coming days, always judging changes in the context of price moves.

So the gold short is solved on Comex at least, and silver is now the problem. The silver bullion shortage was made worse by April’s price smash, and the longs know this, so maybe more entrenched and difficult to shift.

But here is some background that should worry the bullion banks. Last month, physical gold deliveries on U.S. futures markets totaled an unusually high 35 tonnes. On the Shanghai Gold Exchange, according to their website, April delivery volumes totaled 190 tonnes despite six days of national holidays.

If these impressive delivery numbers continue (March was even higher at nearly 300 tonnes) pricing power may be already slipping away from U.S. futures and OTC markets such as London. Having got out of trouble in gold, perhaps the best strategy for the four largest traders is to try to stay out of trouble in both metals by keeping as level a book as possible.

Next week

It seems reasonable to expect precious metals to take a breather next week. On balance, it appears unlikely that recent lows will be challenged and the dangers of a bear squeeze in silver will probably discourage the bullion banks from being too adventurous on the down-side.

Next week is quiet on the announcements front. Look for growing signs of economic slowdown, and perhaps Russia’s further acquisition of gold reserves.  Is Japan’s economy being sucked into a maelstrom?  And we finish with a bit of jaw-jaw from G7 finance ministers to round off the week. Here is the list.

Monday.  Eurozone Composite and Services PMI.  Eurozone Retail Trade.

Tuesday.  Nothing of note.

Wednesday.  Russian FX and Gold Reserves. 

Thursday.  Japan’s Leading Indicator. U.K. Industrial and Manufacturing Production.  BoE Monetary Policy Announcement and Base Rate. U.S. Initial Claims. U.S. Wholesale Inventories.

Friday.  Japan’s Economic Watchers Survey.  Germany Current Account Surplus. U.K. Trade Balance. U.S. Budget Deficit.  G7 Finance Ministers meet in U.K. for two days.

About the Author
Alasdair Macleod

Alasdair Macleod is head of research for GoldMoney. He also runs FinanceAndEconomics.org, a website dedicated to sound money and demystifying finance and economics. He has a background as a stockbroker, banker and economist. He can be contacted at Alasdair.Macleod@GMYF.org and followed on Twitter @MacleodFinance.

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