- Precious metals received a temporary boost from the Fed’s taper postponement
- We stick to our view of lower gold prices for 2013-2015…
- …and present seven reasons why gold prices will decline
- Indeed, investors have liquidated long positions and modestly increased short positions
How did the Fed’s decision impact precious metal prices?
Last Wednesday, the US Federal Reserve decided to continue purchasing of US Treasury bonds and mortgage linked securities at a rate of 85bn a month. This came as a surprise to financial markets, which rallied higher. Indeed, investors seem to share our view that the Fed’s unexpected decision will support US growth and investor sentiment. Precious metal prices also rallied higher. Gold prices surged from 1,300 USD per ounce to a high just below 1,376 or a rally of 6%. A lower USD and higher inflation expectations drove gold prices higher. Silver prices rallied by almost 10% and platinum and palladium by 3-5%. The day following the decision, precious metal prices stabilised. Since last Friday, they have given up most of their gains though.
Did this Fed decision change our gold outlook?
The following seven reasons are why we continue to expect lower gold prices for 2013-2015.
- In our view, the Fed’s decision to slow down asset purchases is only delayed for a few months. We expect the scaling back of stimulus to happen this year at the December meeting. A reduction in monetary stimulus is one reason why we expect higher interest rates for 2013-2014. This shall reduce the attractiveness of gold as a zero-income asset.
- Inflation pressures in the developed world should remain subdued, reducing demand for gold as an inflation-hedge.
- We expect the US recovery to accelerate, reducing the attractiveness for gold as a safe-haven asset.
- A subsequent improvement in investor sentiment shall reduce demand for gold as safe-haven asset.
- And a higher USD will automatically make gold less attractive.
- Investors use every rally in gold prices as an opportunity to sell. The reaction to the rally after the Fed decision wasn’t different.
- Physical demand from India should be discouraged by the gold import duty increases and other measures that aim to reduce the current account deficit.
What about our outlook for the other precious metals?
Our outlook for the other precious metals has also not changed. We expect lower gold prices to drag down prices of other precious metals as well. Therefore, we continue to expect price weakness this year.
What have investors been doing recently?
The latest data (up 17 September) from the futures market show that investors have started to increase their short gold positions again. Moreover, the liquidation of long gold positions has continued (see graph below). We expect that this trend has continued after the Fed rate decision, judging from the recent trend in gold prices. Investors have taken a similar stance towards the other precious metals. They have liquidated long positions and modestly increased short positions. We expect this trend to continue as well.