Precious Metals weekly – Temporary recovery

by: Georgette Boele

150327-Precious-Metals-weekly.pdf ()
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  • Precious metal prices have rallied strongly since the Fed…but their performance has been uneven
  • Silver prices appear to be close to hitting the trough…but they are not there yet
  • …while the pressure on palladium prices is increasing

Remarkable post FOMC returns

Since the FOMC rate decision on 18 March, precious metal prices have performed strongly. Their relative rice performances have been uneven though. For example, silver prices have rallied by more than 9% while palladium prices have barely risen. Platinum and gold prices have rallied by around 4%.

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Why have they rallied so strongly?

A number of factors explain the rally. For starters, precious metal prices have a tendency to weaken if the US dollar rallies and vice versa. In the aftermath of the FOMC statement, which signaled that rates would be hiked at a slower pace, investors have closed some of their substantial US dollar long positions. What is more, the downward adjustment in expectations about the number of Fed rate hikes this year as well as the timing of the first rate hike have made precious metals more attractive as an investment asset. Precious metals suffer when US interest rates rise, because they don’t pay income. As investors now consider that a Fed rate hike is not imminent, further downside in precious in the near term has diminished.

Why has silver outperformed the others?

In general, silver prices have a tendency to react more strongly to movements in the US dollar and US interest rates than any other precious metal and this week was no different. As they both moved lower, silver prices rallied strongly. In addition, silver prices have fallen the most over the recent years. For example since the peak on April 2011, prices have dropped dramatically or by 65%. This massive price action has been unmatched by any other precious metal. Platinum prices, the second worst performing precious metal, have ‘only’ lost 38% over the same period. Earlier in March, silver prices approached the low set in 2014, but the market was reluctant to push prices lower. Since then, silver prices have recovered. Their reluctance to move lower even when other precious metal prices are under pressure is a signal that prices may be close to hitting a trough or have already done so. We expect this to happen in the coming months when investors have further reduced their outstanding long positions and cyclical drivers start to have a more dominant impact. But there is a risk that they already have done so.

Risk for palladium prices

Palladium prices now are on the same level as they were in April 2011, while other precious metal prices have suffered. Up to now, palladium prices have been very resilient, because fundamentals have remained strong, while investor net-long positioning is substantial. The fact that the sell-off has not happened in palladium prices doesn’t mean it will not happen. In fact, we expect a catch-up and a significant weakening in palladium prices because all the positive news is reflected in the price and upside momentum has faded. News that Russia will sell palladium out of its stocks has had a negative effect on prices recently.

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