Gold and silver took a thumping in late June as overbought speculative positions were unwound and gold's contraction of 132 tonnes in the net long on COMEX was the largest weekly absolute fall since mid August 2008. On that occasion the price fell by $63 or 8%, compared with late June's drop of $70 or 5%. The recent drop left the net speculative COMEX long at 649 tonnes, which, despite the massive fall, is not that low; the position was below that as recently as mid-May. The outright long position, at 912 tonnes, was also unremarkable and here, too, the position was smaller as recently as the middle of May.
Arguably, therefore, there is still some speculative "overhang" in the gold market, although the prospect of another massive sell-off has to be greatly reduced. Reflected in signals being sent out by Mme Lagarde, who has stated her determination to get things moving fast at the IMF with particular respect to sovereign debt and capital flows into potentially over-heating developing economies, plus the recent strength of views delivered by the BIS in its Annual Report about the clear need for strong and swift action, there are still plenty of uncertainties in the financial sector to prompt renewed investment in gold. Equally there is still, of course, the possibility that speculative positions will become over-extended on the long side again and, with the physical market still uncertain at higher levels, gold's upwards march is likely to be punctuated by the odd set-back.
The same can be said of silver. A dangerous metal, this one, and has been for many years. Your correspondent has long thought of silver as Cinderella - spends a long time below stairs, comes to the party with a flourish, and when she leaves, she leaves in a hurry. There is a sting in the tail, though; while she may lose a shoe, others lose their shirts. Her recent exit (end-April / early-May) was every bit as dramatic as some of her earlier performances and investors and speculators have retired hurt. The net speculative silver long on COMEX was just 4,536 tonnes at the end of June, the lowest since late April 2009 when silver was trading between $12 and $13 and a drop from 8,194 tonnes as recently as mid-April this year, while the gross long position, at 8,352 tonnes, was the lowest since mid-July 2009. The gross short position was not excessive, though; at 3,816 tonnes (it was higher than that in late May). It is arguable in sliver's case, therefore, that the speculative overhang (or should that be hangover?) has been blown off the top of the market. Whether, or when, investors have the appetite to return to the silver market is a moot point.
Platinum and palladium are also recovering from their recent sell-off, although they have been rather more cautious, reflecting market concerns over industrial demand levels. What is encouraging however is the activity in Japan and the smoothing of the supply chain in the automotive and electronics markets following the disruption in March and April.
The tragic events in Japan in March, with the earthquake followed by the tsunami, produced knee-jerk selloff reactions in both the platinum and palladium markets. Platinum fell by $150 or 8% to approach $1,660, while palladium shed $100 (13%) towards $680. The markets' subsequent consolidation then took another thumping in the final week of June; platinum tumbled to approach the March lows, but palladium's fall was only as far as $720, 5% higher than the bottom of the March move.
The subsequent recoveries mean that platinum is now trading up towards $1,750 and palladium is challenging $780, gains of 5% and 8% in the space of a week. Put another way, platinum has unwound 52% of its late June fall and palladium, 60% (gold and silver have unwound 70% and 100% of their falls).
Part of these recoveries can be attributed to the markets being impressed at the rate with which Japanese companies are recouping lost output. Nissan's auto output was back to pre-earthquake levels by mid-May, while Toyota is expecting domestic production to pick up as of October and be up to normal levels in November; the company is hiring thousands of temporary workers to boost output.
The is still an element of risk, however; domestic output is still subject to an extent to supplies from the electronics sector and there are concerns that a power shortage may develop in Kyushu, the home of a good part of Japan's semi-conductor manufacturing plants. Most auto companies have already adjusted their working schedules in an effort to spread the load more evenly over a seven-day week, but there is still a risk of disruption to electronic component supplies.
In North America, the supply chain has been relatively rapidly restored and the local industry is reporting that inventory levels, which had been expected to remain depleted until the final quarter of this year, but they are already back up to normal in some areas.
The North American auto sector is more palladium-dependent than platinum as it is gasoline fuelled. So, indeed, is everywhere else apart from Europe, where the auto sector is approximately 50% diesel, which favours platinum (although palladium is now making inroads here in this sector also). Platinum's second-largest end-use, the jewellery sector, revolves around China and concerns that the Chinese government will tighten again were proved right early in July. This may well have a further impact on platinum sentiment, leading the platinum-palladium premium to contract. On the other hand, labour negotiations in the South African mining sector may yet prove supportive as the market waits to see whether there will indeed be strike action at AngloPlat.
The net and gross speculative platinum longs on NYMEX are (at 29 tonnes and 38 tonnes respectively), at their lowest since late August 2010. The net palladium long, at 39 tonnes, is not as dramatic a position as it was lower than these just four weeks previously. The outright long, at 48 tonnes, was also undershot recently. In both these metals, however, the prevailing positions are nevertheless close to historic lows.
In principle, therefore, the speculative positions in all four metals point to more upside scope than downside risk - but the road ahead remains bumpy.
