Precious Metals Continue Strong Rally; Jobs Data Falls Short of Expectations
Precious metals have had an attractive return so far for 2016, and continued volatility in the stock markets is only helping. On Friday, Non-Farm Payrolls were released for the previous month of April; the market had been expecting a number around 200k. The actual number released fell well short of forecasts, and came in at 160k.
The stock market declined after the data release amid fears of a slowdown in the economy; the S&P 500 dropped 8 points or 0.39% within half an hour. Although the market managed to recover over the rest of the afternoon on the back of receding concerns of imminent interest rate increases, the index closed up by 0.32%.
Precious Metals show their strength
The real winners on Friday were again Gold, Silver, and Platinum, all of which had impressive gains closing up by 0.86%, 1.06%, and 1.71% respectively. However, what stands out, even more, is the performance these commodities have had since the beginning of the year. All three metals have outshined other traditional assets since the beginning of the year; Gold has seen an increase of 20.05%, Silver 26.06% and Platinum 21.28%.
Those are remarkable returns but compared to other assets like Stocks, real Estate and Bonds they are in a league of their own. Despite its most recent rise, the S&P 500 is only just in positive territory compared to last year, with Friday’s close bringing the broad stock market index to 0.65% YTD. The Dow Jones REIT index, which is representative of a broad index of property funds, has done much better and has risen by 13.35% since the beginning of the year; while the Barclays US Bond index shows a YTD of 3.86%.
Markets rattled by low oil prices
Given the recent stock market turmoil, and the reduced likelihood of multiple interest rate hikes during the rest of the year, precious metals look set to continue their rally. Add to this scenario the continued glut in Crude Oil supply, which has begun creating a multiplication in defaults and bankruptcies. As the rate of failures increases, other sectors of the economy that lay further down the supply chain will also be affected.
Bond defaults are at levels not seen since 2009, causing concern in the credit markets. As other high yield companies try to finance their activities, they will find it more and more expensive as investors will demand an ever higher rate of return to compensate for the higher perceived risk. Eventually making it impossible for some companies to service their debts and causing higher bankruptcy filing rates.
What is smart money doing with precious metals?
The Commitment of Traders reports from the CFTC break down holdings in futures contracts by investor type.
This distinction helps us understand which type of investor is buying and selling futures of all commodities. This includes precious metals, the reports breaks down investors into Processor/User, Managed Money, and Other Reportables. The category we are most interested in is managed money, as it represents all the investment managers, including hedge funds.
Long positions in Gold futures by investment managers has been growing consistently over the past months since the price of Gold bottomed out last year in December. The same can be said for Silver and Platinum. Gold longs indicate futures contracts that have been bought with the expectation of the underlying commodity price to rise from now until contract expiry.
The chart below shows the surge in long contracts by the managed money category has also coincided with the rally in Gold price. The same can be seen for Silver and Platinum. You will also see that the category of producers has also seen a large increase in short positions, these are contracts that are sold with the expectation of the price of Gold being lower at expiry. This indicates a considerable interest in producers to lock in the current prices, in fear of missing out in the case they are to fall. This category is not speculating; they are simply buying insurance that at a future date they will still be able to sell their Gold at a decent price.
Last Friday, April 29, a single fund added 20.8 tons of Gold; the SPDR Gold ETF now has a total of 824.94 tons. This purchase is even larger than the 18 tons it purchased when Gold was still at $1150, which also coincided with the start of Gold’s most recent rally.