Market Report: Finding support

by Alasdair Macleod, GoldMoney:

Gold and silver rallied this week, with gold up $14 from last Friday’s close at $1283 in early European trade this morning. Silver is up by 18 cents at $17.00 over the same time-frame. The best day was Monday, following a weak Friday.

Comex December contracts in both metals are rolling off the board, and this is having an influence on price. Trading volumes are healthy, reflecting roll-overs. Meanwhile, the dollar’s rally peaked last Friday, fell on Monday, and recovered on Tuesday before declining the rest of the week. The gold price merely reflected these moves.

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Silver underperformed gold, with the gold/silver ratio rising from 74.51 on Monday to 75.51 this morning. This is probably due to the contract roll-over, which usually tends to weaken prices, reflected more in the lower liquidity in the silver contract. That said, it is a positive sign that roll-overs appear to be starting early, with the rest of November still ahead of us.

The expiry of December contracts coincided with sharp sell-offs followed by strong rallies last year and the year before. This is illustrated in the next chart, of Comex open interest and the gold price.

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In both cases, November marked the point of major sell-offs, and were followed by a quarter point increase in the Fed Funds Rate in December. The gold price rallied strongly from there.

The difference this time is the lack of a sell-off, reducing open interest to well below the long-term average. You can take two opposing views: the fall ahead of a December low point is yet to happen, which will crucify the bulls, or this time, gold futures are simply in firmer hands. This is where evidence of an early roll-over into the next active contract is important.

Perhaps we should note that so often in markets, just when you construct a rule, it is broken. In this case, the bullion banks, who are short, will be gambling they will get the opportunity to close their positions a third time. Alternatively, it does seem that the managed money longs are more stubborn this time, and that gold is finding its base at current levels.

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