Trader Updates: Precious metals marked down, but downside looks limited

During the past month the whole metal complex has fallen without exception, with
gold and silver leading the way down. The platinum group metals held up slightly
better, but were dragged down by the general retreat. Gold prices are currently down
8% m/m, with silver down 10% m/m. Platinum and palladium are down 2% and 1%,
respectively m/m.

There were three main issues driving prices lower. First, the markets have been
fretting about the early withdrawal of QE by the US Federal Reserve. Second,
markets have been looking in alarm at recent developments in China, where credit
markets have been in turmoil. Third, markets have moved to price in higher US
interest rates, a potential negative for commodities like gold. We believe that a lot of
these concerns are overdone and prices should remain well supported in the next
few weeks.

For gold it is still too early to conclude that the wave of investor selling has ended,
but strong outflows through the first half of this year have been replaced by a more
neutral picture so far this month. The most recent US net managed money positions
for the week ended 9 July showed a 4% w/w rise. This was the second small
increase in a row, although these positions are just bumping along the bottom for the
time being. Strong outflows from physical ETFs have also temporarily bottomed.
These dropped to 63.8mn oz on 9 July and are little changed since then.

Lease rates for gold have also spiked, showing limited appetite to lend, set against
decent appetite to borrow. This is the first time since the credit crunch in 2008-09 that
three-month gold is more expensive to borrow than the US dollar (USD).
It is surprising given the backdrop of heavy physical ETF liquidation. There is not always a close link between lease rates and prices, but
overall we see this as a bullish signal. The forward curve for gold has also flattened.

The one-month price for gold currently stands at USD 1,285.5/oz, little different to the
three-month price which stands at USD 1,285.7/oz. Again, this is a rare occurrence
which shows tightness in the forward market and warns that running short positions
could prove to be costly if sentiment improves.