Precious Metals Weekly – Bubbling below the surface

by: Georgette Boele

  • It looks like a boring market; but a lot is happening below the surface
  • Higher US real yields more than offset a weak dollar
  • We remain negative on precious metal prices because we expect the dollar rally to kick in again


Looks like a boring market…

Since the FOMC meeting in March, precious metal prices have moved sideways. For example, platinum prices have ranged between 1115 and 1180, gold prices between 1170 and 1225, silver prices between 15.6 and 17.4 with palladium moving most of the time in the 750 to 800 range. Price action within the range, has however been very erratic. These ranges look like a bit boring. In fact a lot is happening.


…but bubbling below the surface

The main reason for the range-trading appearance is that opposing factors are offsetting each other. The movements within the range show that at some point in time one factor is more dominant while at  another moment another is.


What are the opposing factors?

The US dollar remains a crucial variable affecting the price of gold and other precious metals. Surprisingly, the weaker dollar has not filtered through to support precious metal prices. For us this is a very negative sign as we remain bullish on the US dollar going forward. If prices can’t profit from dollar weakness, they will suffer even more when it strengthens. We expect a  the dollar rally to kick in again in the coming weeks if US data releases turn out to be better than expected.

Which factors are currently outweighing the impact of a weaker dollar? Developments in the bond market are. Inflation expectations for 5 year ahead have risen in line with higher oil prices. In turn, this has also pushed up bond yields in Europe and in the US. In general, higher inflation expectations are positive for gold prices, which is often seen as an inflation hedge. However, this time around gold and other precious metal prices have been under pressure (with the exception of palladium). Why is this? The rise in bond yields has outpaced the rise in inflation expectations. In short, real yields have moved higher and this is negative for gold. In general, higher yields (especially real yields) are negative for gold and other precious metals because they belong to the group of investments that yield zero or almost nothing.