Market Report: Gold and silver take off

by Alasdair Macleod, GoldMoney:

Since gold bottomed at $1237 on 11 December, it has gained 6.5%, and silver 9.5%. In early European trade this morning gold was at $1317.50 and silver at $17.15.

Our headline chart has been rebased to the December low to capture these figures. It is the third year in succession that gold has had a torrid fourth quarter, bottoming at the same time as the Fed has raised the Fed funds rate. This action always centres on futures trading, particularly Comex. The reason futures exist is to allow markets to even out price swings, by giving speculators a mechanism to take price risk away from producers. Instead, Comex has become the arena for exaggerating price swings, as the last three year-ends attest.

The reason for mentioning this is to point out that much of the rise in precious metal prices is due to the price suppression that commenced in September. The year-end had much to do with it, so in that sense the extraordinary performance of the last four weeks is price normalisation. However, gold’s performance differed from silver’s, in one key respect, and that’s the change in open interest on Comex.

Gold’s OI fell to a low of 446,618 contracts on 12 December, before bouncing strongly in light to moderate trade to stand at a preliminary 545,091 yesterday. This sudden 100,000 increase is reflected in our second chart.

Silver’s performance has been bizarre, with OI actually falling as the price rose. This is our third chart.

In the last month of last year, as the price of silver gained by over 9%, OI fell by 10,000 contracts, signalling that silver was undergoing a vicious bear squeeze. In other words, all gains are purely the result of speculators being badly wrong-footed.

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