Precious Metals weekly – No change in view

by: Georgette Boele

150320-Precious-Metals-weekly.pdf ()
  • Large price swings in precious metals before and after the Fed meeting
  • Adjustment in Fed and US dollar views have not led to changes in precious metals price forecasts
  • Gold will move lower in 2015 and 2016 because of higher US rates, US dollar and positive sentiment…
  • …while platinum, silver and palladium will remain under pressure in the near term followed by recovery

Volatile week

At the start of the week, precious metals prices moved lower, in particular platinum and palladium prices. Platinum prices moved even below our June forecast of USD 1,100 per ounce. This weakness continued until the FOMC meeting. The more dovish than expected FOMC statement resulted in a sharp sell-off of the US dollar as financial markets reduced their expectations for rate hikes this year and next year. A weaker US dollar and lower US rates/yields triggered a powerful recovery in precious metal prices with the exception of palladium.

Why has weakness in palladium prices persisted?

There are several reasons for this. For starters, recently, US and China economic data have come in below the expectations. This has resulted in some downward adjustment in industrial demand expectations for palladium. In addition, there are signs that investors are losing some patience with their palladium positions. The large expected supply deficit has not resulted in the expected price increases so far. Moreover, weak sentiment in other precious metals has spilled over to palladium as well. Investor positioning in palladium is still quite substantial, while positioning in other precious metals has already been reduced.

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Adjustment in Fed and US dollar view

Recently we adjusted our Fed view.  We expect the Fed to start rising rates in September (from June). We also now expect the federal funds rate will rise to 0.75% at year-end 2015 (was 1.0%) and to 2.25% at year-end 2016 (was 3.0%). This is a slower pace than previously expressed. Nevertheless, the US dollar will rally by another 10-15% mostly this year in our view, because financial markets still underestimate the amount of rate hikes. An upward adjustment in US interest rate expectations for 2015 and 2016 should support the US dollar. In contrast, we now expect a recovery of the euro in 2016 (see FX weekly 20 March).

…but no change in our precious metals forecasts

What is the impact of these changes on our precious metals price forecasts? We have not adjusted our forecasts for precious metals. Expectations of higher interest rates and a stronger US dollar will continue to hurt precious metals prices in the near term, because investors will continue to liquidate positions. Later during this year, platinum, silver and palladium should recover because economic fundamentals will become more dominant market forces in our view. Then we expect platinum prices to recover the most. For the remainder of this year and next year, gold prices will remain under pressure because of a stronger US dollar, higher US rates and constructive investor sentiment. So our new Fed and US dollar forecasts have not led to changes in our precious metals price forecasts.

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