Precious Metals Rally From Option-Price Trigger, But "More Short Positions Added"

PRECIOUS METALS rose Monday morning in London, with gold recovering more than $20 of last week's $50 drop to trade at $1287 per ounce as world stock markets fell ahead of this week's technical default by the US government.

Silver outpaced the rally in gold, adding 1.5% by lunchtime in London.

"Although a default would clearly be bullish for gold," writes Jonathan Butler at Japanese conglomerate Mitsubishi, "the US is very unlikely to breach the debt ceiling.

"The coming days could see prices drift lower as the resolution of the crisis prompts a rally in risk assets and a move out of gold."

Senate Democratic leaders yesterday refused to agree a short-term deal to avert Thursday's debt-ceiling deadline only by locking in budget cuts for 2014, the New York Times reports.

Failure by the US to honor its obligations "would mean massive disruption the world over," said IMF managing-director Christine Lagarde. "We would be at risk of tipping yet again into a recession."

Dropping as low as $1264 per ounce on Friday on suddenly heavy volume in US gold futures, gold today "[saw] some quite good physical demand," Bloomberg quotes Bernard Sin at Swiss refining group MKS, refering to wholesaler buying in Asia.

Amongst Western investors, however, the SPDR Gold Trust shed another 9 tonnes of bullion during last week's drop in gold prices, taking the quantity needed to back shares in the largest gold ETF to a new 56-month low of 891 tonnes.

Going into last week's expiry, SPDR options contracts were concentrated Friday in $124 and $122 puts, according to Reuters data.

Having been out of the money all week, those put options – which gave holders the right to sell SPDR shares at those prices – gained value during Friday morning's sharp plunge, with the ETF's shares falling to touch that lower level before ending the week at $122.60.

In Comex gold futures, says ANZ Bank in a note, "It is difficult to gauge the extent of speculative positioning" because the weekly CFTC regulator's Commitment of Traders report is missing thanks to the US government shutdown.

But "open interest has been rising," says Standard Bank's commodities team. "Combined with a declining price, would suggest that new short positions had been added."

Over in India and China meantime – the world's top two physical gold buyers – new data showed consumer-price inflation in both countries rising to 7-month highs in September.

Now at 3.1%, "The rise of [China's] CPI inflation leaves little room for policy easing [ie, interest rate cuts to spur the economy] as the benchmark deposit rate is only 3%," says Nomura's chief China economist in Hong Kong, Zhiwei Zhang.

Gold bullion refineries in India are running at just 25% of capacity, according to industry figures. Because the government's strict anti-import measures, plus falling gold prices domestically, mean they cannot source feedstock to meet the current festive-season demand.

Last week's drop in SPDR gold holdings coincided with a drop of 120 tonnes in the world's largest silver ETF, the iShares Silver Trust.

Shedding metal to back its shares at the fastest pace since May, the SLV only retreated however to a 3-week low at 10,505 tonnes.

Adrian Ash

(c) BullionVault 2013

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