Precious Metals Weekly – Tale of two stories

by: Georgette Boele

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  • Cyclical precious metals recovered despite the deterioration in investor sentiment…
  • … their performance had more to do with profit taking on the US dollar
  • Gold investors used the bounce higher as an opportunity to liquidate ETF positions

Interesting price action

Since 3 October, precious metal prices have recovered. This has coincided with a profit taking wave on long US dollar positions. In the meantime, sentiment on financial market has deteriorated. In general, a deterioration in investor sentiment is negative for cyclical precious metals such as platinum and palladium, especially if there are concerns about the global growth outlook. Meanwhile gold and silver tend to do well, because they act as safe-haven assets. Gold and silver prices have actually behaved like this. They have recovered from the moment investor sentiment has deteriorated (graph below).

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What comes as a surprise is that both platinum and palladium have done relatively well from the moment investor sentiment has deteriorated. Why is this? This behaviour signals that these precious metals are currently mainly driven by direction in the US dollar and only to a lesser extent by developments in the outlook for global growth. This can been seen in the graph to the right, which shows a negative correlation between the US dollar an platinum and palladium prices. This conclusion is in line with our view that the substantial weakness in precious metal prices up to October was mainly the result of the rise in the US dollar. Of course concerns about the global economic outlook were not helpful either. However, if you take these two drivers together, at this point in time the US dollar has a more significant impact on prices than the outlook of the global economy has. This is because a higher US dollar makes precious metals unattractive assets to invest in. What is more, positions in both platinum and palladium are still substantial.

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Investor behaviour

The liquidation in non-commercial positions in precious metals came to a halt recently. So investors have reduced significantly their exposure to precious metals in the futures market. However, other investors seem to have used the bounce in gold prices as an opportunity to sell ETF positions. This signals that the sentiment remains very negative. In addition, total ETF positions in silver, platinum and palladium remain very substantial. Only a partial liquidation could send prices much lower. This will likely play out before the remainder of this year.

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