China PMI’s boost metal complex

Silver led gold higher, but more work needed to shift sentiment

Precious metals trade higher for a third day, supported by fresh dollar weakness, after the market concluded the latest round of hawkish comments from US FOMC members and additional rate hikes were now being fully priced in. Before then both gold and silver had suffered a month of selling, led by silvers near 12% slump and with US bond yields still climbing for fear policy makers may struggle to get inflation under control, the recovery at this stage remains fragile with the dollar and bottom fishing speculators the main source of demand. 

We do however, suspect that the recent slump is likely to have triggered continued demand from central banks, a group that according to the World Gold Council snapped up a record 1,136 tons of gold last year, most of which was executed around the $1800 level. This record demand helped support gold at a time where developments in ETF flows, down 115 tons in 2022, rising dollar and real yields at one point last year showed gold was overvalued by more than 300 dollars. 

Having corrected 155 dollars of the 343-dollar rally from the November low, the question is whether the market is ready for a fresh push to the upside. Much of that will depend on incoming US data as weakness would not only ease concerns about additional rate hikes on top of the three 25 basis point already priced in, but also help weaken the dollar while taking the sting out of the current rally in Treasury yields. 

Investment demand through ETFs remains tepid with total holdings at 2881 tons lingering near a three-year low and down 436 tons since the most recent peak from last April. Speculators in COMEX gold futures meanwhile held a 122k lots (12.2 million ounce) long in the week to January 31 but with subsequent data from the US CFTC having being delayed following the January cyber-attack on ION Trading UK, which caused delays in trading being report, we have yet to find out how much of selling last month was driven by long liquidation from funds.

Silver led the recovery in response to the China PMI report as it gave an even bigger boost to the industrial metal sector. The gold-silver ratio which yesterday hit a four-month high at 88.4 (ounces of silver to one ounce of gold) has since retraced to around 87 and in order to signal a proper reversal the XAUXAG ratio needs to break the uptrend from the December low, currently around 85.35. From a technical perspective, gold and silver as a minimum need to retrace 38.2% of the recent correction to signal an end to the current correction, in gold above $1864, and silver above $22.