Over the course of the last couple of months we’ve seen some exciting, and scary, action in the precious metals market. Predominantly for silver and gold. After free-falls in prices in April and June, July has come off to a considerably better start. The question is have gold and silver prices bottomed.
As the graph below shows, the gold price declined below $1200 in early July but have since staged a rally to $1334 – a move of 13%. In fact, on 22 July gold jumped up by 2.6%, it’s single biggest move in a year on a closing price basis.
The move for silver has been similar to that of gold. The spot price went from $18.50 to $20.50 between end of June and end of July – an 11% move. Just the other day the silver price increased by close to 5%, which is price action that we’ve not seen for a while.
We’ve covered many of the reasons for the latest price drops before. More recently, it’s all been about if the Fed will taper stimulus efforts or not. After the scare in June the discourse have been more balanced as of late, resulting in a much more positive climate for gold and silver. Lower prices have also attracted bargain hunters.
The interesting question now is of course if we’ll continue to see higher prices or not. There are appealing drivers that at least point to rising prices in the short term.
The crossing of the $1300 level for gold forced the closing of many short positions. According to the CFTC Commitment of Traders data, almost 11% of short positions in gold closed in the last week, which is the largest weekly drop in four months. The combined futures and options net long positions increased by 48%, which is the largest increase since November 2008.
Furthermore, the largest gold traders such as mining companies, banks, and dealers have fewer short positions today than they’ve had in a decade. The market thus seems to be more in favor of rising prices, at least in the short term.
The fundamentals for precious metals still haven’t changed. We are continuing to see unprecedented stimulus efforts from the world’s central banks as well as competitive currency devaluation – efforts which will prove very difficult to cease with.
Even so, there is a difference between getting a particular investment case right and getting the timing right for a particular trade.
For gold and silver prices the intermediate and long-term investment cases makes perfect sense. The drivers are as strong as ever. In the short term it still remains to be seen if we’ll continue to see a period of falling prices or not.
There are risks of further downward pressure such as ETF outflows and reduced demand from India. Excess liquidity creates potential risks for air-pockets where prices can gap and free-fall, which they’ve done twice recently. The likelihood for choppy trading going forward is high.
This is not a reason to stay out of the markets though as premiums, prices and other conditions quickly can change. It’s furthermore not a reason to go all in if we see a period of rising prices. It’s simply something to take into consideration as you lower your average cost per ounce by gradually increasing your allocation to gold and silver bullion.