Precious Metals Weekly – Warning sign

by: Georgette Boele

150212-Precious-Metals-weekly.pdf ()
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  • Strong US employment report left its mark on precious metal prices…
  • …and this is just a warning sign of what to come

Precious metal prices moved lower…

Since last Thursday’s close, precious metal prices have moved sharply lower. They have lost between 2 and 4%, with platinum and palladium being the worst performers. Why have prices moved lower? For starters, US employment reports surprised on the upside. This triggered an upward adjustment in Fed rate hike expectations and hurt precious metal prices.

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However, monetary policy easing elsewhere continues to provide indirect support to gold prices. The US dollar reacted positively to this strong report and higher US rates (short end and long end of the curve). In addition, financial markets seem to take a rather optimistic view towards the negotiations between Greece and the eurozone. They are confident – as we are – that there will be a deal eventually. This and the cease-fire in Ukraine have reduced safe haven demand.

…and this is just a warning sign of what to come…

Uncertainty surrounding the negotiations between Greece and the eurozone could dampen the downside in gold and silver prices for now. However, if Greece and the eurozone manage to come to an agreement in line with our view, investor sentiment should improve. An improvement in investor sentiment will often support assets with higher return and precious metals are not such assets.

Moreover, we judge that financial markets have further to go in pricing in 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. Precious metals have a tendency to weaken if US rates rise, because they don’t have an income element.

Last but not least, we expect the US dollar to rally strongly across the board based on diverging monetary policy compared to other central banks and attractive returns on US assets. As precious metals are priced in US dollars, this will be a substantial negative force.

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