- Falling prices across the board, led by palladium
- Temporary weakness or new trend?
Weakness across the board
Precious metal prices have been clearly on the defensive this week, with the more cyclical precious metals suffering the most. Gold and silver have also been under pressure. Gold appears to have a tendency this week to move lower in European afternoon trade when US players start to come in. Weakness in both silver and gold was quite noticeable after the release of US inflation data earlier this week. These data came in around expectations and did not fuel concerns about inflationary pressures. However, the US dollar, 10y US Treasury yields and the Eurodollar futures curve have shown some upward momentum. This does not come as a surprise as the market is focussing on the FOMC minutes to be released later today and the upcoming Jackson Hole Symposium where Fed Chair Yellen will speak about the labour market. The market will likely behave asymmetrically to a more dovish or less dovish stance of Yellen. We expect the largest market reaction in case she sounds less dovish. If this were the case, the US dollar and US yields should rise and gold and silver should drop.
Temporary weakness or new trend?
Palladium prices have strongly outperformed the precious metals complex this year. Indeed, they rallied by more than 21% while the runner-up (gold) rallied by only 7%. The rally has mainly been fuelled by fears about a larger than anticipated supply shortage as a result of the strikes at mining companies in South Africa earlier this year and the risk of lower palladium exports from Russia. What is more, car sales in crucial palladium demand markets have picked up, resulting in a better overall palladium demand outlook. In addition, investors have held an optimistic stance on palladium for the earlier mentioned reasons. Therefore, positions in both the futures market and ETFs have been rather large. However, palladium prices have fallen by almost 3% this week, being the worst performing precious metal. For starters, the market appears to be of the opinion that tensions between Russia and Ukraine have eased somewhat resulting in lower fears that Russian palladium exports will come to a halt. In addition, investors seem to be in the process of reducing some open long palladium positions. This has been reflected by a reduction in net-long contracts and overall net positions in the futures market (see graph below, grey and yellow line). It is too early to say if this is a start of a new trend. However, we have argued for quite some time that if investors move away from palladium, the sell-off in prices will be quite dramatic.