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July 2017 Gold and Silver Market Update

31 July 2017

Gold has had a powerful recovery through the last three weeks of July as the price held technical support at US$1208 level, dipping below very briefly before a surge of physical demand sent the price higher again to make a high at US$1271.20 so far.
The main driver of performance was a the USD index (the DXY) plunging through trend line support at the end of June, opening the month at 95.65 and sinking to 93.15, with what looks like critical support at these levels. Look for the DXY to sink to 91.30 if support at current levels fails, further helping gold.
Dollar weakness stems from two issues – insufficient evidence to support strong tightening in US rates, with weak inflation numbers and a dovish announcement from the Federal Reserve that continues to play its cards close to its chest, but chose to highlight the fact that inflation continues to grind on below the Fed’s target level. The second issue is that the US President and his immediate family and some officials continue to be mired in allegations over collusion with Russia pre-election, and an inability to deliver on legislation. The failure to repeal ‘Obamacare’ is now eating into other deliverables, like tax reform and reduction, which is where American prosperity will really be determined.
Apart from physical demand in Asia, gold also saw a round of buying back on the CME from speculators who were betting on the price weakening further. Those speculators bought back around 3.50 million Tozs, whereas fresh buyers looking for gold to rally only bought around 658,000 Tozs, showing that buying was more about rescuing losing positions than about a real shift in gold’s favour, at least ‘so far’.
In Japan, TOCOM speculators did buy around 385,000 Tozs on a net basis.
Gold ETF holders shed about 2,000,000 during the month as they took advantage of rising prices to get out.
The price is in a good zone technically, above certain levels such as the Weekly Cloud top, and medium term targets extend to US$1287, US$1315 and US$1359. The really key resistance levels are at US$1294-1296, the recent highs, and a move above there could trigger a powerful move to the upside, at least initially.
One the debit side, it is still too early to say that the price has broken free of that incredible long term down trend line from the highs of 2011. It tried in June, but closed well below that level before rallying in July. Additionally, a very long term resistance band lurks above the current price, the Monthly Ichimoku cloud, and however bullish gold’s outlook is, that resistance area will taking some fighting to get through.

Gold Monthly Chart

After a sickening plunge in June that came to a halt in the first week of July, silver has also staged a strong recovery this month, getting back above the trend line support that extends back to December 2015-January 2016. Resistance levels now appear at US$16.92 and US$17.35. The price action does suggest a very positive rejection of the recent lows.
ETF buying in silver saw holdings grow by over 11 million Tozs during July, to 678.301 million Tozs by the 27th of the month, as investors responded to the drop in prices, to some degree.
Futures holdings saw Managed Money long positions decline to 278.50 million Tozs on the 11th of July, the lowest level seen in 2017, before seeing an inflow of buying to take positioning back to 309.8 million Tozs on the 25th of July, the last figure recorded in July by the Commodity Futures Trading Commission (CFTC) an inflow of just over 31 million Tozs of buying from speculators on the price continuing to rise. Managed Money shorts bought back about 41.50 million Tozs, as they hastily reduced their bets from 310.30 million to 268.73 million Tozs. Again, short-covering was a bigger impetus in buying than fresh long positioning, but less obviously than gold as the ratio with silver was 43:57 longs/shorts.
Talking of ratios, the gold-silver ratio strengthened towards 75 after starting the month just above 79. (Silver bulls generally believe that the natural ratio is closer to 45 rather than here, although the long run average taking every fix in the last three decades – since January 1987 – shows a real-world average of 66.42.)
Silver has picked up basis the same drivers as gold, as opposed to picking up support from the industrial aspects to its character. Targets include US$17.48 up to US$17.68 and US$17.79 in the medium term. The Monthly Cloud to which I refer in the case of gold does not make its malevolent presence felt until about US$18.10, nonetheless, it lurks in the distance.