Gold focus turns to bond auctions and potential ECB taper

With gold struggling to move higher, silver has been allowed to claw back some the 15% it lost relative to gold since July. After hitting an eight-month high last month at 77.50, the XAUXAG ratio, which reflects the price of one ounce of gold measured in ounces of silver, dropped to 73.50 on Monday, before once again being bought with traders turning more defensive for the above mentioned reasons.

Speculators have in response to the recent recovery been adding length back in COMEX gold futures, but at 99k lots or 9.9 million ounces, the net long position is still only one-third of the 285k lots peak from February last year when gold traded around $1640. In silver, months of underperformance has seen the net-long slump to just 12.4k lots which represents a 75% drop since the latest peak in May.

With money managers mostly absent on the buy side in recent months, buying has instead been seen from key physical markets such as India and China, together with robust interest from retail consumers snapping coins from US Mint and Pert Mint at the fastest pace in years. Perhaps a sign that retail investors in some parts of the world being charged negative interest on their bank account have chosen gold as a hedge against rising inflation and inflation fears. In addition central banks around the world remains active buyers with the World Gold Council reporting net buying up until July of 347 tons compared with 263 tons for the whole of 2020.

From a technical perspective a close below the 200-day moving average, currently at $1810 may trigger renewed weakness, initially to $1793 and potentially as far as $1770. Apart from the technical outlook investors are likely to focus on Thursday’s ECB meeting, and the rising chance that bank may hit the taper button before the Federal Reserve. If it happens and EU bond yields jump it may support some additional gold-friendly dollar weakness against the euro, while on the other hand further raise the prospect for the Fed potentially acting sooner as well.

Overall we maintain a positive outlook for gold given the prospect for peak growth and no change in official interest rates for several quarters. For now, however, there is no reason to chase the market as long gold fail to cross over to the other side of $1835.