Precious Metals Weekly – Falling knife

by: Georgette Boele

141105-Precious-Metals-weekly.pdf ()
  • Ongoing weakness, with gold prices falling to lowest level since April 2010
  • Sell-off in precious metals is not over yet: year-end target for gold USD 1,100, end-2015 USD 800

From weakness to weakness

Since 21 October precious metal prices have fallen off a cliff, with silver prices losing more than 13%, gold prices around 8.75% and platinum prices around 6.5%. Palladium has once again been the outperforming precious metal (see graph below). The weakness in precious metal prices has coincided with a restart of the US dollar rally especially versus the Japanese yen. This has materialised in an environment that financial markets have slightly adjusted their interest rate expectations for 2015 upwards (see graph on the right).


So far this week, the negative trend has gained momentum. Gold and platinum prices are approaching our year-end targets of 1,100 and 1,150 USD per ounce respectively. Meanwhile, silver prices are already below our aggressive year-end target of 16 USD per ounce and palladium prices are on the right track. There are several reasons for the acceleration in sell-off. For starters, the explosive rally in USD/JPY after the surprise decision by the Bank of Japan last Friday has given a further boost to the US dollar rally. Moreover, news that Republicans have taken the majority in the Senate at the latest mid-term elections also gave a boost to the US dollar and hurt precious metal prices. What is the reason for this? Republicans hold a more hawkish view on fiscal and monetary policy. As a result, financial markets assume now that the Fed will turn more hawkish going forward. This has supported the US dollar and hurt precious metals, because the latter don’t pay income. What is more, there has been disappointment about Chinese demand for precious metals. This has been reflected by lower gold premiums in Shanghai, but also by a slow-down in Chinese car sales.


More weakness ahead

Despite the substantial weakness in precious metal prices since July, lower prices going forward are likely in our view. There are several reasons for this. First, the US dollar rally has further to run especially if the Fed turns more hawkish this year. Moreover, investor positions are still very substantial. Recent data show that positions have been reduced modestly, but more liquidation is likely. As a result, the risk has increased that precious metals prices will undershoot our year-end forecasts. So don’t try to catch a falling knife.