Precious Metals Weekly – Modest weakness ahead

by: Georgette Boele

131023-Precious-Metals-weekly.pdf ()
  • Weaker US employment report supported precious metals
  • Gold and silver may face a less substantial selling pressure in the near term
  • Investors in platinum and palladium may start to liquidate due to a less optimistic economic outlook

Why did gold prices move higher after US employment report?

Gold prices have rallied by around 2% since the release of the US employment report. The weaker-than-expected report has resulted in expectations of a later tapering of bond purchases by the Fed. Moreover, the market has also priced in fewer interest rate hikes for 2015. The main reasons for gold’s reaction are the following. For a start, if the Fed continues with monetary stimulus at the current pace for longer, some investors fear that inflation will become an issue in the future. Moreover, the prospect that interest rates will remain low for longer increases the attractiveness for gold as a zero-income asset. Finally, the general weakness of the USD also supported gold prices.

How did other precious metals do?

Other precious metals rallied as well after the release of the employment figures. Silver prices even outperformed gold prices and rallied by more than 3%. Platinum and palladium rallied by around 1.5% from the release time to the intraday peak. Platinum modestly outperformed palladium, because palladium has a higher sensitivity to the state of the US economy. What is even more interesting is that this morning both platinum and palladium have given up most of their gains. This reaction signals that investors in these precious metals may become concerned about the state of the US economy, while the reaction in gold and silver was merely a reflection of a continuation of loose monetary policy by the Fed.

What is near-term outlook for gold and silver?

We remain negative on gold and silver for the remainder of this year. The moves may, however, be less substantial than we had originally foreseen. For a start, there are signs of increased tightness in the gold market with the spot price being higher than the forward price up to 3 months. Furthermore, a less substantial recovery of the USD will also help gold and silver prices. Indeed, we have changed our outlook on the Fed. We now expect a tapering of bond purchases in March instead of in December. This is in line with market consensus. As a result, gold and silver will unlikely come under heavy pressure if the Fed behaves in line with market consensus. What is interesting to note though is that a dovish Fed is not changing the overall outlook for gold prices. This is because the tapering is only delayed. Sooner or later it will get back on the agenda and influence financial markets again. Moreover, gold and silver prices have only received limited support from the delay in tapering, which is a reflection that the underlying sentiment is still very negative, because gold rallies quickly fade out as investors use the opportunity to liquidate their positions.

What is our near-term outlook for platinum and palladium?

We continue to expect weakness in platinum and palladium prices in the near-term, but the weakness will be more moderate as our taper call is delayed and we see a less aggressive USD recovery for the remainder of 2013. In the case of platinum, the market has priced in a relatively strong economic performance in the eurozone and Japan and given our economic forecasts we doubt if there is much further upside for platinum demand. As such, the market may be disappointed and this could result in investor liquidation. Palladium has a higher sensitivity to the US and emerging markets. Investors in these precious metals may view the necessity of longer monetary stimulus as a sign of weakness of the US economy and adjust their demand expectations accordingly. What is interesting to mention is that investor liquidation will therefore play out but for a different reason.

We will release our new forecasts next week in our commodity quarterly.