Precious Metals Weekly – USD 1,180 per ounce in sight

by: Georgette Boele

131219-Precious-metals-weekly ()
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  • Hopes of higher prices were dashed after the Fed
  • …this year’s low in gold prices at USD 1,180 per ounce is in sight
  • Weaker gold prices to hurt the other precious metals

How did gold react after the Fed?

On Wednesday 18 December the Fed announced that it would taper bond purchases from 85bn to 75bn starting in January 2014. This news pushed gold prices from USD 1,240 per ounce to USD 1,223. Afterwards prices recovered, because the statement was more dovish. As a result, gold prices moved above USD 1,240 per ounce again. When the move ran out of steam and the US dollar started gaining momentum, gold prices dropped below USD 1,220 per ounce. This is an important development, because the market was not able to push gold prices below USD 1,220 after the strong US employment report on 6 December. This break below USD 1,220 per ounce is a bearish sign for the gold outlook. So it is now just a matter of time before this year’s low of USD 1,180 per ounce is tested. If the market is able to take out this support level in thin holiday markets, the next support level comes in at USD 1,134 per ounce.

How did other precious metals react?

The price action in silver also showed large intraday swings after the FOMC meeting. Silver prices weakened sharply in the hours after the decision. Prices so far have dropped by more than 4%. The losses in platinum and palladium have been more modest so far. Platinum prices are now around 1.6% lower than before the decision and palladium has not even lost 1%. If the market manages to push gold prices down towards USD 1,180 per ounce as we expect, the other precious metals should also head much lower. Silver could test and break this year’s low layered at USD 18.22, platinum could clear USD 1,300 and palladium reach our year-end target of USD 675 per ounce.

What did investors do?

The most recent data (10 December 2013) showed that speculative investors did not further liquidate gold, silver and palladium positions, while they did increase platinum shorts. The most likely reason for this inaction was the approaching of the FOMC meeting. With the FOMC decision behind us now, non-commercial short positions in gold, silver and platinum should have increased taking the price action into account. This will become visible in the data in the coming weeks. The release of tomorrow’s report will only cover up to last Tuesday. Investors in precious metal ETFs were more decisive (the data is also more up to date). They continued to liquidate gold positions and the pace appears to be increasing. In the case of silver, the reduction in positions has been at a more moderate pace and in platinum and palladium there has been no recent liquidation at all.

Our outlook for 2014 and 2015 is unchanged

We expect investment demand to be in the driver’s seat and position liquidation to continue in 2014 and 2015. More attractive returns on other investments, the outlook for lower prices, an environment of low inflation risk and positive investor appetite will result in investors reducing gold positions. Indian’s jewellery demand will likely remain weak. We expect Chinese jewellery demand to increase modesty but it will unlikely compensate for India’s shortfall. We keep our year-end forecasts for 2014 and 2015 at USD 1,000 and 800 per ounce, respectively.

 

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