Sell-off in full swing
Since the US dollar started to rally on 10 July 2014, precious metal prices have fallen one by one. Initially, the sell-off was concentrated in gold and silver. Later, however, the more cyclical precious metals such as platinum and palladium could no longer fight the strength of the US dollar. The turn in sentiment was mainly the result of most of the positive news about platinum and palladium being reflected into prices and investors becoming more cautious about precious metals as an investment asset. The presence of large investor positions has made these precious metals very vulnerable to investor liquidation. A higher US dollar and higher US Treasury yields have led to some move but there is some way to go.
Investor position liquidation will send prices lower
On average (since 2007) a 10% change in gold positions (non-commercial positions and ETF positions) coincides with a 4% change in prices in the same direction. In 2013, when a 47% drop in outstanding positions resulted in a 28% drop in gold prices, this relationship was somewhat stronger. For silver prices, there is no clear relationship apart from the fact that position liquidation coincides with price weakness. The relationship, however, is more stable for platinum and palladium. On average, a 10% reduction in investor positions goes hand in hand with a 3% reduction in platinum and palladium prices.
What could trigger aggressive position liquidation?
In general, precious metal prices tend to fall if the US dollar rises. A further rise in the value of the US dollar and upward adjustment in expectations about the path of Fed interest rate hikes in 2015 will, in our view, result in investor position liquidation triggering more price weakness. There could, however, be other triggers for weakness in prices. For example, a sharp deterioration in the global economic outlook and/or outlook for global car sales could send cyclical precious metal prices (silver, platinum and palladium) lower. This will probably go hand in hand with an overall deterioration in investor sentiment. In such an event, gold prices will strongly outperform other precious metals. We attach a low probability to such an event unfolding. Another example is if the prospects for platinum and palladium supply improve substantially, which will send platinum and palladium prices lower. So there could be four reasons that could trigger investor liquidation.