Bottom Line: We think gold and silver are getting closer to the point where the selling stops and a rally begins. We are not bullish yet. Copper longs are still being liquidated, silver shorts are still being added, and gold has sold off despite falling yields.
Gold Sold Through a Bond Rally
Morgan Stanley’s Nick Savone drew attention to the October 22 gold move in his Global Reflections recap:
Gold fell 2.8% despite a 2.9% pullback in the Nasdaq, a 0.2% drop in the dollar and 17bps decline in US 10Y yields (including a 14bps decline in US 10Y real yields). Yesterday would have appeared for all intents and purposes to have been a strong setup for Gold, especially given that correlations with UST yields have been deeply negative, unlike at the start of the year when Gold was behaving like a risk asset. To put the moves into context, the last time Gold performed this badly on an equivalent move in US 10Y yields was December 2008. (via ZeroHedge)
UBS’s trading desk also flagged the poor response to falling yields, describing gold as “still trading in conjunction with risk assets as opposed to underlying macro fundamentals.”
We read the move as liquidation overwhelming the usual support from rates.
Buyers Are Appearing on the Swap Desks
The CFTC’s combined futures-and-options report for October 20 shows swap dealers adding 3,973 gross long gold contracts over the preceding week. Managed money cut its gross longs by 4,065 contracts, while other reportables reduced theirs by 5,100.
Silver shows the same new long buying alongside more aggressive short selling. Swap dealers added 1,908 gross long contracts, while managed money added 2,301 gross shorts.
The fresh long buying is constructive to us, although swap dealers remain net short in both metals. More silver shorts also mean more potential buying if those traders are forced to cover.
Why Copper Matters to Silver
Goldman Sachs trader Robert Quinn’s October 24 note, High Grade Copper Futures: AI Driven Unwind, describes the selling in copper:
Managed Money High Grade Copper unwinds extended through mid-October per Commitment of Traders. Weakness in several demand indicators - namely AI and China - caused the bearish flows. Yet again, length transferred to more physically oriented players. Thereafter, similar price dynamics ensued. Speculative positioning further deteriorated. While US-China competition may limit the downside, note price remains dangerously close to a momentum shift.
We have seen some CTAs add to silver shorts as they liquidate copper longs, sometimes going short copper as well. Once the copper long is gone, some start covering silver. We therefore still expect silver selling while this unwind runs its course, but are watching the silver/copper spread for evidence that the pressure is beginning to ease.
What the 2008 Comparison Gives Us
This chart of gold and Treasury yields after 2008…
The SilverTrade Insider publishes market news and interviews with named analysts. Opinions expressed by contributors and interviewees are their own, and they may hold positions in the metals, miners or securities they discuss. Nothing here is investment advice.
SilverTrade is affiliated with SD Bullion, a precious-metals retailer, and SD Depository, a precious-metals storage company. Some contributors hold roles at affiliated companies. See our Editorial Policy.
