From Alasdair Macleod:
Gold fell from $1268
at last Friday’s close to trade at $1233 in early European trade this
Friday. Silver has been hit very hard, falling from $17.22 to $16.44
over the same timescale. From their peaks in mid-April, gold is now down
4.7% and silver a massive 12%.
Informed sources in
China say that the authorities are deliberately forcing wealth
management products to unwind their long commodity positions. These
WMPs, as they are commonly known, are speculative investment vehicles
that promise attractive returns to private investors, and collectively
amount to a financial bubble. There are two reasons why the government
has intervened. The massive expansion of bank credit in recent years
causes excessive speculation that cannot be allowed to get out of hand.
Furthermore, WMPs were pushing up the prices of the commodities being
accumulated by the government as part of its economic plan.
Effectively, WMPs were
front-running the government. But by clamping down on them, the
government has forced a mini-collapse on base metal prices. Hence,
silver has been very badly hit, and gold less so.
While some gold may be
involved, the selling in the West has been driven by paper markets.
This time, it is not a case of gold being the other side of the dollar
trade, but deteriorating charts are the main driver. The next chart is
the one that spooks speculators most.
This has reversed the
bullish set-up to suddenly become very bearish. Not only has the price
failed to find support at the 200 day and 55 day moving averages, but
both averages are falling in bearish sequence. It is promoting bearish
commentary in the hedge fund community, which is bound to increase.
Technically, the next
support level appears to be at $1200, last seen in early March.
Furthermore, this level has been important support since mid-2015, so
will be watched carefully. Whether this level is challenged and holds
will depend on China and the WMPs, because there can be little doubt
that the government will be an ongoing buyer of the base metal stocks
released as speculative positions are unwound. But at what level? This
suggests that the action is corrective, rather than the onset of a new
bear market in commodities.
In other news, the Fed
held interest rates unchanged after the FOMC’s monthly meeting, but
left the strong impression they would be raised in June. Given the slide
in precious metal prices, this also impacted negatively on market
sentiment.
This weekend sees the
final round of France’s presidential election, and the opinion polls put
Macron clearly in the lead. Informed sources suggest that Le Pen’s camp
expects to lose, and is now concentrating on attacking a president who,
without party backing and a population 40% of which want to leave the
EU and/or the euro, is expected to be in difficulties after he’s
elected. Le Pen expects to win next time.
The market has
discounted a Macron victory, so there may be a little bear closing early
next week. Far more important is what happens to those WMPs.
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