Investor sentiment has been increasingly negative toward the precious metals markets since the start of the year, a reality that is reflected in the lack luster price performance of these metals, especially gold and silver. Some investors remain interested in buying gold and silver, but they are demanding lower prices before they buy more. Other investors are selling their precious metals positions, driving prices down to levels that can accommodate the more cost conscious buyers. This shift in investor sentiments and trading patterns has been the prime factor driving prices lower since the beginning of the year.
Investors have been growing increasingly price sensitive and impatient waiting for prices to realize the fresh record highs promised by various commodity price forecasters at banks and on the internet, following the high prices reached in 2011. After watching several failed attempts by precious metals prices to break key resistance levels during 2012, precious metals investors, especially those with a shorter term investment objective, grew disillusioned and began to exit these markets in large volumes in 2013.
According to data from the Commodity Futures Trading Commission (CFTC) between the start of this year and 28 May net managed money positions in the precious metals markets as a group declined by 55.4%. The decline has not been limited to the precious metals, but has been part of a more broadly based investor disinvestment in commodities. According to data from CFTC reports, net managed money positions (excluding energy) suffered a 30% decline during the same period. A lot of the money that exited from the commodity markets landed in the equity markets. The premise for this rally in the equity markets is based on economically negative factors. Corporate profits have risen due to a reduction in the labor force and a reduction in capital expenditure. Both of these factors are economically negative for the broader economy over the longer term and damage the sustainability of corporate profits. This is bad not only for the equity markets but also for commodity markets.
As can be seen in the chart, precious metals have suffered more strongly than the rest of the commodity markets. One of the primary reasons for this is the reluctance on the part of investors in buying gold and other precious metals at elevated price levels and reduced demand from shorter term investors who do not see much upside potential in these metals in the near term. Among the precious metals, gold and silver have been most severely hit, with net long positions held by large non-commercial market participants for both metals declining to multi-year lows at the end of May 2013.
For gold, net long positions had slipped to 5.52 million ounces on 28 May 2013, which was the lowest level reached since the middle of November 2008 when these positions had slipped to 5.2 million ounces. Net long positions held by large non-commercial silver market participants had declined to 14.75 million ounces on 28 May, their lowest level since April 2003, when these positions were at -2.1 million ounces. The decline in net long positions to these low levels at the end of May 2013 was largely the result of a buildup in gross short positions. Gross short positions in gold reached a record high 11.3 million ounces on 28 May and gross short positions in silver reached 149.6 million ounces, just shy of the record high 149.8 million ounces reached on 9 April 2013. Gross long positions rose at the end of May for both gold and silver, but those increases were outweighed by the increases in gross short positions.
The buildup of large gross short positions is indicative of a major shift in investor sentiment toward these metals. It shows their willingness to build and hold positions that are designed to profit from declining gold and silver prices, which stands in contrast to the investor sentiment between 2009 and 2012 when investors were building long positions in anticipation of ever increasing prices.
The decline in net long positions and the increase in gross short positions to present levels could suggest that the short-term downside potential is limited. If the market were to receive some price positive news there could be short covering and possibly some long building which could provide support or even briefly push gold and silver prices higher. If such positive news were to enter the market but gold and silver prices do not respond positively there could be another round of short building and long liquidation, which could push these metals prices back to levels seen in the middle of April or lower still. Recent price rallies have been accompanied by continued building of short positions. If this continues to occur gold and silver prices could experience another sharp decline in prices. Longer term investors remain interested in owning gold and silver and would use the weakness in prices resulting from shorter term investors liquidating their positions as a buying opportunity. Countering the argument that prices may find support in the fact that short positions already are at record levels is the most critical realization that these investors continue to hold these positions even at recent and current low prices: They are not liquidating their short positions, suggesting that they are anticipating sharply lower prices.
Reduced investor interest in gold and silver is also evidenced by the decline in metal held by physically backed exchange traded products (ETPs). At the end of May, investors had reduced their combined holdings in gold ETPs (GLD, IAU, SGOL, AGOL) by 15.7 million ounces from the end of 2012, with total holdings in gold ETPs declining to 70.8 million ounces, the lowest level since the middle of 2011. The decline in silver ETPs (SLV) has been relatively less dramatic, with investors reducing their combined holdings to 616.4 million ounces at the end of May 2013, down 2.7 million ounces from the end of 2012.
Platinum and palladium have been faring better relative to gold and silver during 2013. The supply and demand fundamentals of these markets are relatively stronger than those of gold and silver. That said, the gold market has a strong short-term influence on the prices of the entire precious metals complex, which can cause other precious metals prices to rise and fall irrespective of their fundamentals. As a result of this platinum and palladium prices have softened alongside that of gold during 2013. Palladium, which is the least influenced by gold, has been able to make a healthy recovery during May from declines earlier in the year because of its robust supply and fabrication demand fundamentals.
Gold market participants are likely to treat economically positive news as negative for gold prices in the short term, bringing down the entire precious metals complex with it. Positive news however suggests economic growth and with it at least the prospect of an increased probability of inflation. While this could be interpreted as being potentially positive for gold, the reality is that the realistically probable levels of economic growth most likely would not be sufficient to materially push inflation higher. Meanwhile, economically negative news might be seen as positive for gold, but the expected or likely forms of negative economic news: lower growth prospects rather than major financial market disruptions, probably would not be sufficient to stimulate a lot of interest in gold. As a result, negative economic news could push silver, platinum, and palladium prices lower, while positive economic news might not help these metals due to the possibility that it would drag the entire precious metals complex down alongside gold.
Over the short term of the next few months precious metals prices remain vulnerable to another spike to lower levels. Investors should consider any decline in platinum (PPLT, WITE, GLTR) and palladium (PALL) prices as a buying opportunity, given the positive supply and demand fundamentals of these markets. Another leg down in gold and silver prices, as seen in the middle of April this year, could provide a buying opportunity for shorter term focuses investors in these metals as well.