Precious Metals Weekly – More weakness ahead

by: Georgette Boele

Precious-Metals-weekly - 19 February 2015 - More weakness ahead.pdf ()
  • Weakness in precious metals continues…
  • …because of constructive investor sentiment, higher US rates and strong US dollar
  • …and we expect more weakness ahead

Weakness in precious metal prices continues

Since the end of last week precious metals’ prices have moved lower. Despite a strong start of the year, platinum prices have dropped below last year’s low and our target for end-March of USD 1,150 per ounce is within reach. This is despite the stronger eurozone growth data (an important market for platinum demand). The sentiment in silver prices has also deteriorated. Earlier this week silver prices dropped by more than 5%. They have recovered somewhat since then, but this will likely be temporary. We continue to expect silver prices to drop to USD 15.5 per ounce by end March 2015. Also palladium and gold prices have moved lower.


What hurt prices?

Most precious metals’ prices peaked on 22 January. Since then, prices have fallen between 6-10% (except palladium). An improvement in investor sentiment, higher US yields and a strong US dollar are mainly behind their price weakness. The improvement in investor sentiment is somewhat odd because discussions between Greece and the eurozone continue. Despite this, financial markets seem confident that Greece and the eurozone will come to an agreement eventually.

Higher US yields mainly reflect that the risk has risen that the Fed will increase official rates this year by more than currently is priced in. This has pushed interest rates on the Fed funds futures for the end of 2015 and 10y US Treasury yields higher. The more dovish than expected FOMC minutes dampened the move though. In general, higher US rates and yields reduce the attractiveness of lower yielding assets such as precious metals.

Weakness ahead

Going forward, we expect weakness in prices to continue because of our optimistic US dollar view, and our expectations of more Fed rate hikes this year than financial markets currently anticipate. In addition, the positive investor sentiment we expect is not supportive for gold prices either. Our gold price targets for the end of March and the end of 2015 are USD 1,150 and 1,000 per ounce respectively.