Precious Metals Weekly – Drivers remain the same

by: Georgette Boele

140410-precious-metals-weekly.pdf ()
  • US employment report triggered lower interest rate expectations, supporting gold, …
  • … which also benefited from (geo) political tensions and expectations of a possible ease in import restrictions by India
  • Supply concerns provide some support to platinum and palladium

What was the impact of the US employment report?

Last Friday, the US employment report came in strong. However, the rise in the participation rate was seen as a signal that the Fed may hike interest rates later in 2015 than thought before. This resulted in lower interest rate expectations for 2015, which had a negative impact on the US dollar across the board. Therefore, gold prices were able to profit as well. Silver prices tracked gold prices, but the move was more modest, though. Initially, palladium was out of favour, which could have been some profit taking on existing long positions, but on Tuesday they recovered again.

What are the drivers for gold prices?

As the graph below shows, gold prices are the most sensitive to developments in the US dollar. So the lower US dollar was profitable for gold. In addition, gold prices also received support from the increasing tensions between Russia and Ukraine, following the latest developments in East Ukraine. In general, gold prices always tend to receive some safe haven support from (geo) politics tensions. However, the impact is smaller than headlines would suggest. Finally, gold received support from expectations that India would ease import restrictions.


Ukraine/Russia tensions and strikes support palladium

In the case of platinum and palladium, the strikes at mining companies in South Africa linger on. Although the pressure to end the strike is increasing, this may not be enough to force the end of strikes in the near-term. So far, mining companies have reduced stocks to meet their supply commitments. This has moderated the impact of the strikes on prices. It is difficult to forecast when the strikes will end, but once they end we expect a sharp fall in platinum and palladium prices. Palladium prices have been influenced also by concerns about supply from Russia. If tensions between Russia and Ukraine increase, investors anticipate the possibility of lower supply, and this supports prices. As we do not expect a full-blown crisis, concerns should fade over time. This will likely trigger a large wave of investor liquidation of net long palladium positions.