Precious Metals Weekly – At the mercy of US data

by: Georgette Boele

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  • Precious metal prices moved lower…
  • …on higher US rates, lower inflation expectations, better investor sentiment, higher USD…
  • We expect more downward pressure ahead, because of better US data…
  • …and eventually an end to the strikes at mining companies

How did precious metals perform since end of last week?

Since last week, precious metals have fallen under pressure, with gold and palladium losing the most (see graph below).


There are several reasons for this. For starters, short-term US rates have continued to edge higher, which hurt assets with low or almost no income, such as precious metals. Moreover, US equities have performed well in an environment of constructive investor sentiment, reducing demand for safe-haven assets such as gold. In addition, the market appears to be less concerned about developments in Ukraine. This has manifested itself in lower safe-haven demand and pressure on gold prices as well. Palladium prices fell under pressure due to waning concerns about supply coming from Russia, but they have recovered afterwards. Furthermore, inflation expectations have come down. For example, inflation expectations derived from the 5-Y US Treasury market has moved lower since 7 March. In Europe recent lower-than-expected inflation numbers also have reduced inflation expectations. Furthermore, central banks in emerging markets such as in Brazil and India appear to be vigilant in watching developments in inflation. Lower inflation expectations in general hurt demand for gold, because gold is seen as the ultimate hedge against inflation. Last but not least, the US dollar has recovered and this adds pressure on precious metals as well.

What do we expect going forward?

Tomorrow, the ECB will decide on interest rates. If it sounds more dovish than expected, it could put some further pressure on gold prices. However, US economic data and interest rate expectations will probably be the dominant drivers of precious metals and in particular gold and silver prices. Recently, Fed’s Chair Yellen, may have tried to dampen rate hike expectations somewhat, but gold prices failed to bounce higher on it. This is a signal that investors in gold believe that more monetary stimulus is unlikely and they fear higher interest rates. A stronger-than-expected US employment report on Friday and in general better US data (shrugging off the cold winter) could put precious metal prices under heavy pressure. Gold prices may even already drop below our end of June projection if this happens.

Developments on the strikes also important

In the case of platinum and palladium, developments concerning the strikes at mining companies in South Africa continue to be a major support for prices. General elections will be held on 7 May. Some believe that the strikes will be over by then. If the strikes would indeed come to an end, while fears about Russian palladium supply further ease and gold prices drop, then the bottom will fall out under platinum and palladium prices. This is because investors will liquidate a part of their large outstanding long positions.


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