Silver continues to move down in its trading range. The top end of that range is now $20 to $20.10 while support now comes in at around the $19.20 to $19.00 level basis spot.
If this support level were to be decisively breached then the next support level would be in and around the $18.70 to $18.50 level basis spot. Silver fell 0.1% last week after falling by 1.9% in the previous week.
Silver did rally quite strongly on the back of the worsening Ukrainian situation with the price hitting a high of $19.90 on Thursday. But then a stronger dollar encouraged more short selling by CTAs and other traders on the Comex. When silver failed to break its 100 day moving average at $20.00 there was also a wave of stale bull selling.
The encouraging feature to silver these days is the continuing strong buying being seen on the Shanghai Gold Exchange. The SGE premium is currently trading at between $1.50 to $1.80 an oz.
But as noted in last week’s report, China’s silver imports declined in July, to 97 tonnes from 107 tonnes in June. Year to date China has imported 912 tonnes up from 692 tonnes for the same period in 2013. Though this year’s import numbers are ahead of 2013 due to a strong January and February, the 2014 imports are still well below those of 2010–2012.
For the silver price to move higher, China would need to ramp up imports very sharply. This seems unlikely because China’s current silver stocks are already fairly hefty.
In fact for silver the bias lies in China importing less metal in the second half of this year than in the first half. This is based on the fact that since 2011, the second half has been characterised by seasonal weakness, with silver imports declining month on month from September through to December.
Of course, a sharp fall in the silver price would alter this trend. We suspect that some of the strong buying we are now seeing in Shanghai is to take advantage of the lower price. The year to date average for silver has been $20.14. But just to prove that everything is relative, the spot silver price averaged $23.80 in 2013.
Chinese and Asian buying seems to be come into the market when gold approaches the $1,280 area. But as soon as we approach the $1,290 area or above we now see waves of producer selling and selling by CTAs and macro funds. This makes sense from a technical point of view as the 100 day moving average comes in at around $1,294.75 and the 100 day moving average comes in at around $1,285.
According to the latest Commitment of Traders Report, net gold longs on Comex were reduced again by no less than 2.4 million ozs in the week up to 26 August. Gross shorts increased by around 1.3 million ozs and gross longs reduced by 1.1 million oz. Holdings in the SPDR gold ETF also fell during this period by around four tonnes. Gold rose 0.7% last week after falling by 1.4% in the previous week.
As a result of the worsening Ukrainian situation the borrowing costs for some European governments have moved down to all-time lows as the market is starting to price in a greater probability of the ECB embarking on a QE stimulus programme as growth in the euro zone continues to slow. German 10-year government bond yields dropped to 0.87% late last week. At the beginning of 2014 the yield was 1.9%.
An ECB QE programme is likely to provide liquidity to the financial system more broadly than just the European Union but many economists think that the effect will be much less positive for gold than the Fed’s QE programmes have been. This is mainly because the Euro is not the reserve currency of the world. As a result, the main benefit should be seen in gold denominated in Euros rather than dollars.
Vladimir Putin has called for talks on the “statehood” of southeast Ukraine. This comment will heighten fears that Moscow is seeking the partition of the Ukraine. But how positive it will be for gold in the short to medium term remains to be seen.
There will be no military action taken by NATO as the commitment to defend NATO states does not extend to the Ukraine which is not a member of NATO. So sanctions are the only weapon that can be used against the Russians.
Chinese gold imports in July slowed to only 21.1 tonnes. They were
52.3 tonnes in May and 36.4 tonnes in June. This decline comes as no surprise given that the SGE premium was around zero for most of July. The only published data of gold entering China is Hong Kong export data. Over 90% of China’s gold is imported via Hong Kong.
Year to date China’s gold imports are now lower than 2013 levels despite a strong start to 2014. The strong start to 2014 was thanks to a low gold price. Gold averaged $1,244 in January and $1,222 in December and there was also strong demand leading up to the Chinese New Year.
At the current rate China will have imported around 770 tonnes of gold from Hong Kong in 2014 – down from 1,108 tonnes in 2013.
We expect the August number to be marginally higher month on month. This is because the SGE premium has moved up to around $2/oz in August.
More broadly, we believe it will be difficult for Asia as a whole to match the gold demand of last year – especially in H2:14. India has seen little relaxation of its gold import duties. But, perhaps more importantly, the big difference between 2014 and 2013 is that gold plummeted from $1,600 to $1,200 between April and June last year, which saw gold demand in many Asia countries accelerate in the second half.
We are unlikely to see a similar scenario this year. This is because market expectations have adjusted to the lower gold price and for demand to really accelerate we would need still lower prices.
Copper is under pressure again on the back of fears about the slowing Chinese economy and now a Eurozone where the industrial recovery has slowed to a standstill.
The Chinese government’s official purchasing manager’s index, which measures the health of factory activity, fell for the first time since February. It fell from a two-year high of 51.7 in July to 51.1 in August. The HSBC index fell to 50.2 in August, down from an 18-month high in July of 51.7. This was the weakest reading in three months. A reading above 50 indicates expansion in Chinese manufacturing, while a figure below 50 indicates contraction.
Technically speaking, overhead resistance has now moved down and now stands in and around the $7,020 to $7,030 per tonne area basis three months while support is expected to come in at around the $6,900 per tonne area basis three months.
The bears point to the fact that LME copper stocks rose last week by a net 2,100 tonnes. This means that August showed the first monthly gain in LME stocks (a net gain of 1,700 tonnes) since June 2013. Copper stocks on Comex also rose 1,200 tonnes week on week. In contrast stocks on the Shanghai Futures Exchange fell by 6,800 tonnes last week.
The bulls argue that LME stocks are so low that stocks increasing by a few thousand tonnes a month is neither here nor there.
On Friday copper had a backwardation of $27 per tonne versus a backwardation of $22 per tonne on the previous Friday. Copper fell 1.3% last week after rising by 3.0% in the previous week.
There is a large dominant position holder in copper. This position has been developed, it is thought, by one party utilising reverse cancellations and re-warranting of copper already sitting in LME warehouses.
The dominant position holder is able to squeeze the spreads and pushing the forward curves into backwardations. In copper, the data reveals that the dominant warrants holder is also a net long in the near-dated positions, and has not only effectively squeezed the spreads in August but created the conditions for last week’s price rally.
But the bears point out that it has always been the case that a market squeeze can only support prices for as long as the fundamentals remain firm.
If supply starts to increase and demand begins to slacken as seems to be happening in China and Europe, then the bears should win in the end and the dominant position holder will withdraw from trying to squeeze the market.
And this is why the bears are still looking for $6,500 per tonne in coming weeks.