Gold And Silver Retreat On Speculation Stock Margin Calls Will Prompt Liquidation Of Long Metals Positions

Rich Asplund - Barchart - Fri Sep 11, 1:52PM CDT

Dec Comex gold (GCZ20) on Friday closed down -16.4 (-0.83%), and Dec silver (SIZ20) closed down -0.434 (-1.59%).

Precious metals prices on Friday settled moderately lower. A slump in the S&P 500 to a 5-week low Friday fueled concerns that investors may need to liquidate long precious metals positions to cover margin calls in stocks. Losses in metals were contained due to a weaker dollar and lower global bond yields, which boost demand for gold as a store of value.

Stronger than expected data from Asia on Friday bolstered the prospects for the global economic recovery to continue, which is bearish for gold but supportive for industrial metals demand and silver prices. China Aug aggregate financing, the broadest measure of credit growth, rose +3.58 trillion yuan, stronger than expectations of +2.585 trillion yuan and the biggest increase in 5 months. Also, Japan Q3 BSI large all-industry business conditions rose +49.6 to 2.0, stronger than expectations of +7.6 to -40.0 and the highest since Q4 of 2018.

Comments on Friday ECB chief economist Lane sparked a rally in government debt prices that lowered global bond yields and is supportive for gold prices when he said inflation in the Eurozone has been "significantly muted" by the stronger euro and will remain negative for the rest of the year. The 10-year German bund yield fell -4.8 bp Friday to -0.481%. Also, the 10-year Japan JGB bond yield fell to a 1-month low Friday of 0.020%, and the 10-year T-note yield fell -11.0 bp to 0.667%.

Friday's U.S. consumer price data was stronger than expected and supportive for gold demand as a hedge against inflation. U.S. Aug CPI ex-food & energy rose +0.4% m/m and +1.7% y/y, stronger than expectations of +0.2% m/m and +1.6% y/y.

Gold prices still have safe-haven support on heightened U.S./China tensions and risks of no-deal Brexit.

Precious metals prices have ongoing support from the Covid pandemic that has curbed global growth prospects and prompted the world's central banks to maintain or even expand their QE programs, which is bullish for gold demand as a store of value. The Covid virus has now infected 28.371 million persons globally, with deaths exceeding 914,000.

Safe-haven demand and dovish central bank expectations have sparked fund buying of precious metals in recent months. Long gold positions in ETFs on Thursday rose for the twelfth consecutive session to a new record high of 3,412.75 metric tons (data since 2002). However, liquidation of long silver positions has emerged with long silver positions in ETFs falling to a 1-month low Thursday. Long silver positions in ETFs had risen to a new record high of 897.10 million troy ounces on Aug 25.

Big Picture Gold-Silver Market Factors: Bullish factors include (1) highly stimulative monetary policies by the world's key central banks to prevent systemic stress in the global financial system and combat the economic damage from the Covid pandemic, (2) low global bond yields, which boost demand for gold as a store of value, (3) low global inflation that is dovish for central bank policies, (4) fund and retail buying of precious metals with long gold and long silver positions in ETFs at all-time highs, and (5) safe-haven demand due to the Covid pandemic, trade tensions, end-2020 Brexit risks, and global geopolitical risks involving Iran, North Korea, and Venezuela. Bearish factors include (1) fears of long-term deflation due to the massive economic damage from the pandemic, and (2) sharply reduced industrial metals demand, including for silver, due to the plunge in global economic activity from the Covid pandemic.
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