First, while I am bullish in the long-term on C (we have Jan options), it seems highly likely that BAC will need to be recapitalized. We’re looking for an eventual price collapse whereupon we will begin heavily accumulating BAC (totally unnecessary transparency statement: Bank of America is the Company’s bank).
We have been bearish on gold and silver for several months now and yesterday’s action made us rethink our position. You don’t want to get caught in a single-minded frame where you fail to see what is happening in front of you on the charts. On reflection we remain bearish on silver and gold, and I’ll tell you why.
The Financial Times writes:
Investor inflows in gold exchange traded funds have stagnated this year and speculators have made big reductions in their bets on further price gains, prompting analysts to begin questioning if the decade-long rally for the gold market might be nearing exhaustion.
Holdings in gold ETFs have dropped 16 tonnes (0.7 per cent) this year to 2,244 tonnes by the end of June, according to data from the Royal Bank of Scotland.
RBS also highlighted a significant shift in positioning in the gold futures market with a 17 per cent drop in the net long position (bets on further price gains) held by speculators in the latest data (week ending June 28).
They also note:
James Steel, precious metals analyst at HSBC said that the gold market had shifted its attention from the Greek sovereign debt crisis and negotiations over the US budget ceiling to the broader pull-back in commodity prices linked to a slowdown in Chinese manufacturing activity.
“The shift in focus by gold (investors) from sovereign debt and fiscal issues to (other) commodities is interesting,” said Mr Steel.
He pointed out that recent weakness in commodity prices had led to some selling pressure in the gold market from index investors (broad commodity indices hold gold as well as oil, base metals and agricultural commodities).
Mr Steel added that if commodity prices continued to weaken due to concerns about the outlook for global growth, those declines could create “significant headwinds” for the gold market.
Further, the Financial Times reports record outflows from commodities:
Commodity-linked exchange traded products suffered record monthly outflows in May and their largest ever drop in assets after big withdrawals from precious metals ETPs by investors, according to research by Barclays Capital.
In total, investors pulled $3.8bn from commodity ETPs, the largest monthly outflow since the bank started to collect this data in January 2005.
Withdrawals by investors combined with falls in commodity prices in May to have an even more dramatic impact on assets held in commodity ETPs, which dropped by a record $11.7bn to $185bn.
The outflows from commodity ETPs were matched by large withdrawals of $4bn from commodity index swaps which are mainly held by institutitonal investors.
Analysts at Barclays said such large-scale outflows were unusual but they did not represent a turning point for commodity markets as the sell-off was a repeat of a pattern seen several times since 2009 when investors became more concerned about the outlook for the global economy.
Furthermore an interesting article of Alphaville suggests ETF investors consistently mis-time the commodities market:
Their conclusion, as Reuters pointed out, was: “Stock prices fall after equity ETFs rake in huge sums of money, and they rise after ETFs post heavy outflows,” said Vincent Deluard, global equity strategist at TrimTabs, in a release. “Simply put, ETF investors are impressively wrong in both directions.”
This does not surprise me. GS and MS and etc. wait for you to buy, and then they sell, or vice-versa. We all know this. Now with this Alphaville article in mind, the Financial Times also writes of yesterday’s silver rally that primarily retail investors are buying SLV now, and:
But analysts have warned that silver prices could be vulnerable to a sharp correction as an increasing supply surplus is expected in coming years.
Philip Klapwijk, executive chairman of GFMS, the precious metals consultancy, said silver would probably hit the $50 an ounce mark this year.
But Mr Klapwijk also warned: “There’s no convincing economic reason for why this is happening. It is still a market with a very large surplus.”
Suki Cooper, precious metals analyst at Barclays Capital, said she was concerned that interest in silver ETFs had become concentrated among retail investors.
Ms Cooper pointed to high levels of silver coins sales as evidence of the strength of retail investor interest in silver, while also noting that bets on further price gains by hedge funds (as shown by the net speculative long position on the Comex market) had risen only modestly this year.
Ms Cooper said there had been a “good recovery” in silver’s industrial demand but emphasised that total consumption had not yet recovered to its pre-crisis levels.
Pointing to the increases in silver supply expected from mine production, scrap and government sales, Ms Cooper warned that silver prices had become “detached from their fundamentals”.
Ole Hansen, a senior manager at Saxo Bank, said investment flows has been one of the main drivers for silver’s rally, and noted that a number of large hedge funds had “joined the party”.
Mr Hansen said this could potentially be a problem once the rally had run its course. “Silver continues to be a relatively small market and high beta (volatility) version of gold, which makes the journey north a fast and exhilarating ride. But one has also got to be aware that the rollercoaster contains big drops where speed normally picks up.”
Daniel Major, an analyst at the Royal Bank of Scotland said silver was “richly priced” when compared to its underlying supply and demand dynamics.
“The message is: do not chase silver at these levels,” said Mr Major.
Note that I have pointed out several times in this blog (or its predecessor) that there is actually a big surplus in silver, contrary to a lot of the nonsense we see floating on the web written by misinformed investors.
McClellan describes yesterday’s action as a short-covering rally. He notes that when prices revert to a price-time convergence, what usually follows is a resumption of the previous trend (which for silver and gold would be, of course, down).
Finally I call your attention to the fact that the rally couldn’t have been a break-out because the volume was mediocre:
If this was a breakout from the downtrend, we should have seen huge volume. What happened yesterday was retail investors throwing away their money.
However, always expect the unexpected, particularly in today’s market.
