Precious Metals Weekly – Change of fortunes

by: Georgette Boele

140416-precious-metals-weekly.pdf ()
  • Better US data hurt gold prices
  • Pressure on gold spilled over to the other precious metals
  • We continue to expect price declines this year

What happened to gold prices this week?

Between the start of April and 14 April, gold prices rallied from USD 1,280 to 1,330 per ounce on expectations that the Fed may hike later or less aggressively than was anticipated after the March FOMC meeting. Moreover, increased tensions between Russia and Ukraine and the probability of more severe sanctions pushed gold and palladium higher on Monday. This rally came to an abrupt end when US retail sales surprised on the upside on Monday. This signaled that the US economy may be stronger than originally thought. Moreover, the improvement in sentiment, i.e. the rally in US equities, resulted in lower safe haven demand for gold. As a result, gold prices dropped below USD 1,300 per ounce. The higher than expected US CPI resulted in some expectations that the Fed may need to start increasing rates earlier than thought. This put gold prices under more pressure. It is interesting to see that gold prices took 7 business days to rally, while it dropped in just 2 days. This is not positive sign for the gold outlook.


How did other precious metals behave?

They all had a strong start of the week, palladium in particular. The prospect of sanctions limiting Russian palladium exports pushed palladium prices above USD 800 per ounce, a level not seen since August 2011. However, the fortunes of precious metals changed on Tuesday. For some time USD 800 per ounce was viewed as a psychological level in palladium prices. When this level was reached, it appears that investors took some profit, pushing prices lower. Moreover, the sell-off in gold prices also weighed on the other precious metals.


Outlook for this year

For the remainder of 2014, we expect precious metal prices to weaken because of the following reasons. Over the course of 2014, better than expected US data should improve the overall sentiment in financial markets and this will result in an adjustment of interest rate expectations for 2015. This will probably already support the US dollar and hurt precious metal prices this year. First, there will be lower safe haven demand for gold and to a lesser extent silver. Second, higher US interest rates will make non-income paying assets such as precious metals unattractive. Moreover, we expect Russian palladium supply fears to fade and strikes at South African mining companies to end eventually. Both will result in lower prices.