- Divergence in gold price drivers, but market’s view on the Fed remains key
- End of a 5 month strike at platinum mining companies in South Africa
Divergence in drivers…
The rally in gold prices that has been in place since the FOMC meeting on 18 June has lost some momentum. On the one hand, 5Y US inflation expectations have continued to rise while on the other hand geopolitics risks (Ukraine, Iraq) have eased somewhat. As these drivers have started to diverge, gold prices have lost momentum. In addition, the recent better than expected US data, for example housing and consumer confidence data, have added pressure on gold prices as well. This is in contrast to the movements in currency markets where the US dollar only temporary benefitted from the better US data.
…but market’s view on the Fed remains key
The market’s view on the Fed remains key for gold and other precious metal prices. For starters, if the Fed continues to downplay inflationary pressures, inflation expectations will rise further and this will support gold as being an inflation hedge. What is more important is that a dovish Fed will hurt the US dollar, because the market’s view about Fed rate hikes in 2015 will remain subdued. This will make the US dollar an attractive funding currency in carry trades with some of the investments also ending up in gold. Low official rates make gold an attractive investment, because of low or negative real yields. As soon as the Fed changes its mantra and signals that interest rates are on the way up, the outlook for gold changes dramatically. Not only will the prospect of higher interest rates hurt gold as investment asset, it will probably also anchor inflation expectations. Therefore, gold will lose two important supports in one go: inflation hedge and low or negative real yields. What is even more important that in this environment the US dollar will rally, adding even more pressure on gold prices. To sum up, the current stance of the Fed gives support to gold, but this will change going forward in our view.
End of a 5 month strike
Yesterday, the Association of Mineworkers and Construction Union (AMCU) and the three largest South African platinum mining companies signed an agreement, resulting in the ending of a five month strike over pay. An agreement was already in the air since 12 June, but new demands from AMCU resulted in a delay of the agreement. The agreement includes a pay increase of as much as 8%, or 1,000 rand/month for lowest paid workers, whichever is greater. Wage-increase offers are over 3 years and the increases will be backdated to July or October last year (depending on the company) until the strike started on 23 January. The expectation is that it will take up to 3 months before production can be restored. The market reaction has been relatively muted so far. Platinum and palladium prices have only started to react once the agreement was signed. As the agreement was already in the air for some time, some investors had already reduced their net long positions. This manifested itself in a relatively small reduction of net long commercial positions in the futures market. However, total ETF positions have not been reduced so far. This signals that investors continue to expect higher prices. If this does not materialize in the near term, the pressure to take profit on open positions will increase, leading to lower platinum and palladium prices, which is in line with our view.