Precious Metals Weekly – Near term support

by: Georgette Boele

150204-Precious-Metals-weekly.pdf ()
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  • Rally in gold prices has fizzled out…
  • …but support (low US yields, investor sentiment) remains in place for now
  • The environment will probably become less favourable going forward…
  • …leading to lower prices

The rally in gold prices fizzled out…

Gold prices started the year strongly with a positive return of around 10%. However, the rally lost momentum and since 22 January prices have fallen modestly. What explains the behaviour of gold prices so far this year?

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 …but support remains in place for now

A deterioration in investor sentiment and the pricing out of Fed rate hikes this year have supported gold prices and prices of other precious metals. This has been reflected by gold prices moving higher in tandem with equity market volatility (VIX). In addition, lower US 10y Treasury yield and lower December 2015 money market rates have also provided support to gold prices.  A lower 10y US Treasury yield reflects several things. For starters, a lower probability of Fed rate hikes this year. Moreover, a deterioration in investor sentiment. Last but not least, the downward pressure on German Bund yields as the result of ECB QE, has also spilled over to the US Treasury market. Lower US yields and monetary easing by other central banks elsewhere make gold as an investment more attractive. Furthermore, a deterioration in investor sentiment will often result in some safe haven demand. In short, the environment has been very favourable for gold. Though the recent optimism on the negotiations between Greece and the eurozone has hurt gold prices somewhat.

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The environment to become less favourable

Uncertainty surrounding the negotiations between Greece and the eurozone could dampen the downside in gold prices for now. However, if Greece and the eurozone manage to come to an agreement in line with our view, investor sentiment should improve. Moreover, we judge that financial markets have gone too far in pricing out possible Fed rate hikes this year. We stick to our view that the Fed will embark on a tightening cycle around mid-2015 and will hike more than financial markets currently anticipate. As a result of both factors and a higher US dollar, gold prices should move sharply lower this year and next year.

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