- Some recovery after the fierce sell-off…
- … but this will probably be temporary
- Our new precious metal forecasts reflect more downside in cyclical precious metals
- … but we keep our gold forecasts in place
Some recovery after the fierce sell-off
Since the end of last week, precious metal prices have shown a substantial recovery. Prices have recovered roughly between 3-7%. This does not come as a surprise after they experienced a fierce sell-off between 10-20% (start of July until last Friday). As the sell-off was mainly the result of a substantial rise in the US dollar and downward adjustment in global growth expectations, the recovery in prices was predominately the result of profit taking on US dollar long positions, which became excessive.
We have made downward adjustments to most of our precious metal forecasts. This is despite the recent recovery. Why have we become more negative on precious metals? For starters, the recent sell-off in some precious metals has even been more fierce than we had expected. Moreover, for a long time we have held a negative view on precious metals and we continue to hold this view. The surprisingly strong start of the year did not alter our conviction. In the third quarter precious metal prices erased part of these gains (palladium and gold) or far more than that (silver and platinum). A rise in the US dollar, a downward adjustment in global growth expectations and less supply concerns were the main drivers for this, resulting in investors reducing net-long positions in precious metals. It is likely that the US dollar will rally strongly again in coming months. We think the key driver will be an upward adjustment in expectations about the path of the Fed’s policy rates in 2015. The combination of higher US rates and a higher US dollar is a negative mix for precious metals. This will trigger a further liquidation of investor positions, which are still very substantial (especially the ETF positions). However, financial markets will probably also become less negative on the global growth outlook, in our view. This should dampen the downward momentum in the cyclical precious metals somewhat. It is unlikely that it halt the downward momentum though, because precious metal prices are far more sensitive to the US dollar and US interest rates at this point in time.