Precious Metals Weekly – Pressure building

by: Georgette Boele

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  • Gold prices lower after FOMC and better US data
  • Investors have decreased gold positions again, but this tendency is not seen in other precious metals
  • The gold options market points to lower gold prices

What was the impact of the FOMC last week on gold?

Since the FOMC decision last week, gold prices have moved lower. This can be explained by the following. The market had expected the Fed to sound very dovish. The fact that tapering was still mentioned resulted in a recovery of the USD and hurt gold prices. In a way the market translated the statement as being less dovish, while we believe that the only script that played out was a Buy-the-Rumour, Sell-the-Fact market reaction. Gold prices came further under pressure, because US economic data surprised on the upside. Gold prices are currently stabilising above USD 1,300 per ounce waiting for more news about the state of the US economy.

What is the focus of the market?

This week important US economic data will be released such as GDP and US employment report. Gold prices have been very sensitive to the release of US economic data. If the recent wave of improvement in US data continues in line with our expectations, gold prices will fall further.

What have investors been doing lately?

The liquidation of gold ETF positions has continued, while the more speculative positions have stabilised, because investors closed both long and short positions. However, the data on the speculative positions do not reflect the latest price action. The conclusion we can draw from all of this is that investors are still selling gold.

 

In the other precious metals the speculative net positions have also decreased, albeit at a very low rate. However, investors have increased ETF positions in both silver and platinum, while they have liquidated some palladium ETF positions. The total ETF positions in these precious metals are extremely high and therefore they pose a serious price risk.

Options market points to lower gold prices

The gold options market points to more pressure to come on gold prices. The bias turned negative in October 2012 and has ever since not moved to neutral territory again. This shows that investors are positioned for lower prices. The recovery of gold prices since June has resulted in a less negative bias. However, the market has not come close to being neutral. Recently, the bias has become more negative again and there is quite some room to move even lower. This is in line with investor behaviour manifested by the positioning data. We expect lower prices for the coming years.

Update on demand from India

The latest data show that Indian gold demand for Diwali (festival of light) festival has been very disappointing. The measures taken by the government to discourage gold imports are clearly being felt. The Associated Chambers of Commerce and Industry of India said in a survey that Indian buyers head for diamonds and platinum instead of gold because of the high gold prices in INR. However, we believe that this will likely be temporary, because there are already reports that India is considering raising the import duty on polished diamonds from 2% to 5%.