Precious Metals Weekly – A spectacular recovery

by: Georgette Boele

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  • A stunning recovery in gold prices…
  • …which we judge will be only temporary
  • This recovery also supported other precious metals…
  • …while stronger economic data gave extra support to platinum and palladium

Interesting price action

The immediate reaction to the no-vote on the Swiss gold referendum of 30 November was in line with expectations. Gold prices dropped to 1,142 USD per ounce. Then a remarkable thing happened. Gold prices showed a stunning recovery during that same day. Why did this happen? For starters, there was market talk of a hedge fund being in trouble and it needed to unwind short gold positions. Moreover, India announced that it would relax gold import rules (the so-called 80-20% was being abolished).

Since then, gold prices have not been able to approach 1,150 USD per ounce anymore, even not after the very strong US employment report. This report triggered an upward adjustment in US interest rate expectations for 2015. However surprisingly, the US dollar failed to rally strongly on this report and gold prices were clearly protected on the downside. This was reflected by how reluctant gold prices moved lower on the report.

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The market has now tried two times in one month to clear the 1,140 level and it was unsuccessful. It is likely that it will first test the room for prices to go higher before there is a new attempt to clear the 1,140 level. What has helped gold prices as well is that the US dollar has lost ground and risk aversion has risen. Both are supportive developments for gold prices. As a result, gold prices are back above 1,230 USD per ounce.

Even though in the short term the momentum is on the upside, we continue to hold the view that the recovery in gold prices is only temporary. A further rise in the US dollar, positive investor sentiment and expectations of higher US rates are major negatives going forward.

How have other precious metals behaved?

Silver prices have behaved like gold prices. The recovery in gold prices also pushed silver prices higher. Silver prices are almost up by 19% compared to the low set on 1 December. The more cyclical precious metals – platinum and palladium – were positively affected by the lift in gold prices as well. More importantly, stronger than expected global economic data also gave strong support to prices.

However, in the coming 6 months we judge that they will be unable to disconnect from a new drop in gold prices driven by a stronger US dollar and higher US interest rate expectations. Once investors have cleared their excessive positions, they should be able to recover strongly and closely follow developments in the global economy.

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