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Market Report: Strong rally on bear closing

Alasdair Macleod
|
Friday, January 6th

jan4 2017 gold vs silver

2017 got off to a good start for precious metals, assisted by a fall in the US dollar.

The euro having been under pressure rallied by nearly 3%, bearing in mind it is 40% of the dollar index. At last night’s close, gold was up 2.5% and silver 4% in the first week.

Bear closing is the order of the day, as forewarned in last week’s market report. Everyone seemed to be bullish dollar/bearish everything else, and that was bound to reverse at some time. Whether the December highs for the dollar marks a significant turning point remains to be seen. If not, the bullion banks have unfinished business with bear positions in gold futures on Comex yet to be fully closed. The next chart is of net swaps in gold.

2017 net swaps vs. gold

Ideally, the swaps would have a level to slightly long book, as they did one year ago. This allows the bullion banks to profit by selling contracts to hedge funds, before building a short position if demand escalates. The danger to the swaps arises if they start from a short position and find they become too short for comfort.

In the dying days of 2016, there was considerable bearishness amongst commentators, signalling that the market was very oversold. Gold and silver have been left behind, relative to the strength of key industrial commodities last year. Gold closed up 8.6% against the dollar, iron ore up 80%, zinc 65.7%, copper and nickel 17.2%, and Brent crude 52%. This suggests that fiat currencies are buying less, even though we are mesmerised by the dollar. And if fiat currencies are buying less, then the gold price should have an upward bias.

The physical market has seen good demand at these low levels, presumably from central banks and value buyers. The Italian banking system is in limbo with the Banca Monte dei Paschi di Siena still suspended as the rescue is worked out. At least a rally in bond prices has reduced pressure on the Eurozone banks, but this is likely to be a short-term affair, with commodity price inflation tending to drive dollar bond yields higher in the coming months.

There is much confusion over India, with conflicting reports over premiums and discounts. The Modi government introduced a 10% sales tax on gold recently, and official prices are at a small premium to the international price. This means that dealers in India face a loss after the sales tax, because the premium is insufficient to cover it. Meanwhile, smuggled gold has been trading at significant premiums, reflecting the questionable purchasing power of the cash rupee. In China, premiums of up to $40 have been recorded recently, reflecting value buying.

China has become complicated, with the authorities squeezing currency bears by forcing higher overnight rates. Bitcoin soared, but has now fallen back. It feels as if this is a temporary situation, over which the Chinese Government will regain control.

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