Precious Metals Weekly – Under pressure

by: Georgette Boele

140909-Precious-Metals-weekly.pdf ()
  • Investor sentiment towards precious metals is deteriorating…
  • … because of a stronger US dollar, higher US yields and a stronger US economy
  • Silver and gold have moved closer to our end September forecasts
  • Meanwhile, platinum has reached it while palladium is still far off

Precious metal prices remain under pressure

This week, precious metal prices have remained under pressure. Gold and silver prices have moved closer towards our end September targets of 1,200 and 18.5, respectively. Meanwhile, platinum prices have fallen below our target of 1,400, while palladium prices are still far away. There are several reasons for precious metal weakness. For starters, the US dollar rally has gained momentum and this has done damage to precious metal prices. The graph below shows this negative relationship between gold and the US dollar (also see our Precious metals monthly – US rates matter released 29 August). Going forward we expect, the US dollar rally to accelerate, because of a strong US economy and our above-consensus view of Fed rate hike in 2015.

pm weekly 9 sep -

Moreover, 10y US yields have risen, resulting in a deterioration in the precious metal outlook. A recent report from the San Francisco Fed, suggesting that financial markets are underpricing the path of Fed rate hikes, has resulted in an upward adjustment in US yields. In general, precious metals suffer if US yields rise, because they don’t offer income. Currently, gold prices have very negative relationship with both 10y US yields and expectations of 3-month US interest rates December 2015 (= ED Dec 2015, see graph below).

PM Weekly 9 Sep --

What have investors done?

Investors have reduced net long positions in gold, silver and platinum. For example, net positions in gold decreased because of lower outstanding long positions and higher short positions. While the reduction in net positions in silver and platinum are mainly the result of an increase in short positions. Investors have also reduced total ETF positions in most precious metals albeit the overall move has been rather small. We can conclude from all of this that investor sentiment towards precious metals is deteriorating. However, palladium appears to be an exception for now, because of the outlook of a larger supply shortage on the background of the Ukraine crisis. In the event that the Ukraine crisis were to ease, also palladium prices could fall quite substantially.

PM weekly 9 Sep