The gold price is finding it impossible to entirely ignore the weakness among cyclical commodities. There were also some more striking changes: as per the customs authority, exports to China climbed by 28% to a six-month high of 21.7 tons, Gold exports to Hong Kong even totaled 59.8 tons in September, which is 65% more than in August and the highest monthly volume in at least 1½ years. This points to high Chinese gold imports from Hong Kong.

Silver is about unchanged so far this year but weakness returned in mid-May, with prices down 5.6% in the Q2. We attribute this to aggressive selling in the futures markets and lower physical investment demand.

Supply perspectives reveals: Mine output, which accounts for about 80% of total silver supply, could continue to rise this year after a 43M ounce or 5% increase last year, which reflects lower primary producers total cash costs.

On the demand side, silver industrial demand, which accounts for 50% of demand, should grow at a moderate pace, reflecting higher industrial output growth, especially in the emerging markets where most silver is consumed. An important part of this demand could come from solar panels, which is set to continue to rise at a solid pace, particularly in China and India.

We think while the likelihood of a short-covering rally has increased in the short term, we believe that prices will remain weak (we come up with coverage of technical analysis as well in our upcoming posts), reflecting a challenging environment, including a higher dollar, rising US real interest rates and stronger equities.