- Precious metals’ sell-off has accelerated…
- …on investor liquidation
- …and more weakness is on the cards before the end of the year
What has happened in precious metals?
Since the end of October, precious metals have fallen under heavy pressure. Silver has lost almost 14%, while gold and platinum have dropped by around 6% and 4% respectively. Investors in gold and silver are nervous about the upcoming tapering of the Fed. Better-than-expected US data releases have increased the possibility that tapering may be earlier or more aggressive than initially thought. Moreover, the rally in US equities up to the end of November has highlighted gold’s and silver’s unattractiveness. They have a tendency to underperform when investor sentiment is positive and investors are searching for more attractive investments that have the prospect of capital gains and/or offer income. What is surprising though, is that the sell-off in platinum comes at a time that economic data from the crucial platinum demand countries have not disappointed. This highlights that the negative sentiment in gold and silver is also dragging down platinum.
Why has palladium outperformed?
Palladium is the most cyclical precious metal with the largest exposure to the US economy and emerging markets. The better US economic data have not resulted in higher palladium prices, but shielded palladium from weakness in other precious metals up to now. Palladium has lost its cyclicality, because the positive news such as supply shortage and a strong US economy has already been priced in. As a result, palladium has been more sensitive to the weakness in other precious metals. We expect this loss off cyclicality to continue in the first half of 2013, but its cyclicality should return thereafter.
Do investors continue to liquidate?
Recent data from the futures market show that investors have stepped up selling gold and silver positions. Not only have they liquidated long positions, they also have increased short positions. In addition, investors have continued to reduce total gold and silver ETF positions. In the case of platinum investors, have increased short positions resulting in a drop in net positions. In palladium, however, net positions dropped as a result of long liquidation. Overall, we can say that the sentiment in precious metals has clearly deteriorated. Our year-end forecasts of USD 1,350 per ounce in platinum and USD 19 per ounce in silver have been reached, while that of gold of USD 1,200 per ounce will likely soon be reached. In the case of palladium, our year-end target of USD 675 is not within reach yet, but more weakness in precious metals before year-end should push palladium prices in that direction.