Precious Metals Weekly – In vogue for now

door: Georgette Boele

140515-precious-metals-weekly - In vogue for now .pdf (472 KB)
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  • (Geo) political developments continue to support precious metals…
  • Platinum and palladium remain in vogue… but for how long?

(Geo) political developments

Developments in Ukraine and South Africa have supported precious metal prices. Recently, the comments and behaviour of Russian President Putin point in the direction of a possible de-escalation going forward. Russia’s interest in Crimea seems to differ from its interest in other parts of (South) Eastern Ukraine. With sanctions being increased, Russia appears to take a more cautious stance, although Russia’s moves should be seen against the background of its desire to keep significant political and economic leverage over Ukraine. Financial markets remain skeptical though. Therefore, gold and palladium prices have only slightly reacted to these developments. Even though the situation remains volatile, we do not expect Iran-style sanctions limiting Russian commodity exports reaching global markets. If our analysis proves to be correct, investors will likely liquidate part of their positions, pushing prices lower.

 

Since 23 January strikes at South African mining companies have hampered platinum group metal (PGM) supply. Platinum group metals is a term used to collectively refer to ruthenium, rhodium, palladium, osmium, iridium and platinum. So far close to 20% of production has been lost. It will get increasingly difficult to restart production at some shafts even if strikes were to end soon. In April, the three major mining companies proposed a revised offer to the Association of Mineworkers and Construction Union or AMCU (the union that has called the strike). On behalf of its members, AMCU turned down this offer. As a result, these mining companies have communicated the offer directly to their employees. They have put in place, or are putting in place, mechanisms for employees to accept the offer individually. Some of the mineworkers seem to be willing to accept the offer, but they appear to be concerned about intimidation and violence. At the elections of 7 May, the ANC won a strong majority in South Africa. This outcome does not point to further polarization. This is a positive development, because the possibility of resource nationalization has decreased. Moreover, we expect the government to start playing a more active role in ending the mining conflict (also see South Africa Watch – “After the elections” by Marijke Zewuster released 13 May). So at some point in time, these strikes will come to an end and result in investors taking profit on their long platinum and palladium positions. But it will take time to bring production on-line.

Investor positioning

Since the start of 2014, investors have piled into gold, platinum and palladium pushing prices higher. Gold has lost most of its attraction since March, while platinum and palladium remain in vogue. The above mentioned political developments and stronger economic data have been the main reasons behind platinum and palladium’s attraction. However, there seems to be another driver at play as well: a weaker US dollar. Currently, palladium has even a higher sensitivity to US dollar than gold has. This points into the direction that investors have also bought into palladium and to a lesser extent platinum, because of a weak US dollar. What we can conclude from all of this is that the rally in platinum and palladium is only partly fundamentally driven, which is a dangerous development.