Gold and silver had a bad week, with gold falling $25 to a low of $1262 by the Comex close yesterday, and silver by $0.50. This morning UK-time prices opened a little better on overnight physical demand, no doubt stimulated by those lower prices. The background to this poor performance was dollar strength relative to weak currencies, with the yen, euro and pound all declining sharply. It feels like the market is drained of all positive sentiment, which is reflected in the very low level of open interest in the futures market. These conditions are more consistent with a market that is bottoming out than one that is about to fall sharply. Meanwhile retail demand seems to be stabilising, with growing interest for coins in the west, and weekly physical deliveries in Shanghai have quietly doubled over the last two months. Demand for physical gold has the stealthy effect of increasing the gearing of the shorts in the paper markets.
However, it looks like the short sellers have returned in some force, with good Comex volume last Tuesday and healthy turnover again yesterday (Thursday). Open interest in gold rose, which with a falling price confirms futures are being driven by an increase in short positions, most probably in the managed money category. This is shown in the chart below, and is particularly noticeable since 27th August, the start of the current decline.
This post was published at GoldMoney on 05 September 2014.