Precious Metals Weekly – Hawkish Fed hurts prices

by: Georgette Boele

140320-Precious-Metals-weekly.pdf ()
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  • Easing safe-haven demand…
  • …and a more hawkish Fed hurt precious metals
  • Outlook for gold and silver remains negative…
  • …and platinum and palladium could plunge lower if strikes end

Easing safe-haven demand…

Early Monday morning, gold reached USD 1,390 per ounce after the result of the Crimea referendum. Since then sentiment in financial markets has improved. This is merely a reflection that financial markets attach a lower probability to a full-blown crisis in Ukraine. This manifested itself in a lower equity volatility index (VIX) and pressure on gold prices. Weakness in gold prices also spilled over to the other precious metals, in particular silver.

 

…and a more hawkish Fed

Ahead of the FOMC decision, gold and silver prices were already under pressure. This was not only the result of lower safe-haven demand, but also because of nervousness about the Fed. The Fed sounded more hawkish than expected because of its interest rate projections and comments from Chair Yellen. As a result, market expectations for US 3-month interest rates for 2015 moved higher and so did US 10-Y yields. This was major support to the US dollar and a substantial headwind for precious metals. Not only is the higher US dollar negative for precious metals, but also higher US rates. Gold and silver are relatively sensitive to these drivers. Therefore, they have fallen most under pressure. This week gold prices lost around 3% and silver around 4%.

 

Despite our recent FX forecast changes, we continue to hold a positive view for the USD this year and next year. Moreover we have above consensus rate hike expectations for the Fed. These are strong negative drivers for gold and silver.

What about platinum and palladium…

Both precious metals have edged lower this week, but supply-related issues continue to support prices. However, if strikes at mining companies in South Africa end, prices could plunge lower. This is because part of the substantial long positions in both precious metals will be unwound.