Precious Metals Weekly – Nothing spared

by: Georgette Boele

140918-Precious-Metals-weekly.pdf ()
  • Stronger US dollar and higher Treasury yields push precious metal prices lower…
  • … with no precious metal being spared
  • Palladium and platinum prices are the most vulnerable to investor liquidation

Higher USD and Treasury yields push precious metals lower

Weakness in precious metal prices have continued this week, with palladium prices being hit the most. Gold prices were relatively resilient only falling by about 0.4%. Why did precious metal prices suffer? Because of a further rise in the US dollar and higher US Treasury yields. The graph below shows the relationship between precious metal prices and the US dollar. This relationship is strongly negative if the 5-day (for all the precious metal prices) and 90-day rolling correlations are taken into account.

PM Weekly 18 Sep -1

Higher US Treasury yields highlight the unattractiveness of precious metals as an investment. It will not come as a surprise that the Fed’s signal that more rate hikes are likely over the coming years have hurt precious metal prices.

Weakness is aligned

In the recent past, platinum and palladium were quite resilient to a stronger US dollar and higher US Treasury yields. Recently, however, they have become very vulnerable. This vulnerability is against the background of lower price support from supply related fears. What is more, investors have been heavily positioned in both platinum and palladium. They appear to have become cautious or even nervous after the recent price action. In general, investors have increased short positions in most of the precious metals and reduced long positions, pushing net-positions lower. If the US dollar continues to rally and US Treasury yields to rise – in line with our view – investors will further liquidate precious metal positions, resulting in lower prices. The largest downward price risk is in both platinum and palladium in our view, because position liquidation in gold and silver has already been on its way for some time, while liquidation of platinum and palladium positions has only recently started.

pm weekly 18 Sep - 2

Precious metal prices are firmly on the course of reaching our targets for the end of September and the end of December. What is more, platinum prices have already moved below our September target. We expect more weakness ahead so this is not an opportunity to buy platinum on dips.

PM weekly 18 Sep - 3