Precious Metals Weekly – Running out of steam

door: Georgette Boele

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  • Better US data failed to hurt precious metals…
  • …as inflation expectations moved higher and developments on (geo) political front gave support
  • We expect price declines this year… reflecting a strong USD dollar and positive investor sentiment

What was the impact of US data on precious metals?

Last Friday, US employment report came in above expectations. This pushed US Treasury yields higher and supported the US dollar. Initially precious metal prices moved lower. However, shortly thereafter gold and other precious metals prices recovered, while the USD continued to move higher. This divergence was rather remarkable. The main reason for this divergence is that US inflation expectations derived from the US Treasury market also moved higher. To conclude, gold prices recovered quickly, mainly because of higher inflation expectations after the release of this strong US employment report.

This week, US data came in stronger, but they have not hurt precious metals. There are several reasons for this. For starters, developments in Ukraine supported gold and palladium prices last Friday and the start of this week. Moreover, better than expected US data have not resulted in a significant change in interest rate expectations for 2015. In addition, palladium and platinum have become more sensitive to economic fundamentals again, because strong economic data have increased the prospects of higher industrial and autocatalyst demand. Therefore, investors continue to sit on their long platinum and palladium positions. Comments from Fed Chair Yellen yesterday dampened the mood though, which appeared to have triggered some profit taking.

 

Developments on (geo) politics

On 7 May South Africa held presidential elections. At the time of writing, the results were not published yet. A few days before the elections, South African President Zuma accused union AMCU of irresponsibility for dragging on a wage strike in the platinum sector. The strikes at mining companies continue and it remains unclear when they will end. The second largest platinum producer said that if the strike at its South African operations continued it would have to cut supply to clients to 40% of demand over the next three to four months. These developments have resulted in investors comfortably holding on to their platinum and palladium long positions. However, comments from Russia’s President Putin yesterday that hint towards a slight de-escalation in Ukraine have resulted in pressure in platinum and palladium prices.

Outlook for this year

For the remainder of 2014, we expect precious metal prices to weaken. Over the course of 2014, better than expected US data should improve the overall sentiment in financial markets and this will result in an adjustment of interest rate expectations for 2015. This will probably support the US dollar and hurt precious metal prices this year. We judge that it is unlikely that strong US data will trigger strong inflation fears and thus support gold. Moreover, we do not expect a full-blown energy or military crisis in the Ukraine. We expect low safe haven demand for gold, because of constructive investor sentiment. In addition, we judge that strikes at mining companies in South Africa will probably come to an end at some point in time. This should result in a sharp liquidation of investor positions, pushing prices lower.