Precious Metals Weekly – Down, down, down, down

by: Georgette Boele

Precious-metals-weekly-1-October-2014.pdf ()
Download
  • Dreadful quarter for precious metals…
  • … but weakness has further to go
  • Investors have become negative on precious metals

Dreadful quarter for precious metals

The third quarter of 2014 saw significant weakness in precious metal prices with silver prices losing 19%, while palladium prices dropped by ‘only’ 8% (see graph below). Such substantial moves are not uncommon in precious metal markets. At the start of Q3, we called for aggressive price weakness and our forecasts reflected this view. Except for gold, prices in platinum, palladium and silver even moved below our end of September targets of 1,400, 800 and 18 USD per ounce, respectively. Meanwhile, gold prices closed Q3 at 1,208 USD per ounce just above our target of 1,200.

20141001 - PM weekly1

Why have precious metal prices weakened so much? In short, the rally in the US dollar has been the driving force behind precious metal price weakness. Precious metal prices have a tendency to weaken in an environment of a stronger US dollar. The graph in the column on the right manifests this negative relationship. What is more, precious metals as investment assets are unattractive when US interest rates start to rise. A significant upward adjustment in expectations of US interest rates has yet to materialise. It is likely that this will happen in Q4 2014. Therefore, weakness in precious metal prices has further to run.

20141001 - PM weekly2

Investors have liquidated positions

Investors had been very patient with their positions in precious metals, in particular platinum and palladium. But over recent weeks, they seem to have panicked. The latest data from the futures market indicate that net-long positions in gold, silver, platinum and palladium have been reduced significantly. Not only have long positions been cut back, more importantly short positions have risen substantially. What it more, total ETF positions have also been reduced, albeit at a more modest pace. The conclusion we can draw from all of this is that investors have become negative on precious metals as a whole. With outstanding positions still being net-long, liquidation of positions has still further to go resulting in more price weakness.

20141001 - PM weekly3