Precious Metals Weekly – What is the trend

by: Georgette Boele

  • Under pressure again…
  • …but a strong trend is still missing…
  • We expect precious metal prices to weaken in the coming months…
  • …and a price divergence afterwards between gold (lower) and the others (recovery)

 


Under pressure again…

What started as an indirect US dollar move hurting precious metal prices transformed itself into a direct US dollar move. This sound very complicated, but in fact it means the following. On 18 May, the supportive environment for gold and other precious metal prices came to a halt. Comments from ECB Executive Board member Benoit Coeure announced in a speech that the ECB would frontload asset purchases in May and June ahead of the summer lull, when new issuance will dry up and activity eases due to holidays. This resulted in considerable euro weakness. Meanwhile investor investment towards the US dollar improved. Therefore, the US dollar was able to profit more from euro weakness than gold did. So the gold price denominated in dollars moved lower.

Afterwards, US inflation and economic data have come in above expectations. As a result, investors have modestly adjusted upwards their Fed interest rate expectations for 2015 and 2016. This has supported the US dollar across the board and has weighed on precious metal prices. This week US GDP second estimate will be released. Currently, expectations in financial markets are too negative in our view. So a more optimistic outcome will probably result in higher US dollar and interest rate expectations and weigh further on precious metal prices.

…but a strong trend is still missing

As we indicated in earlier publications, investors are pulled back and forward in precious metal markets. Every time gold prices pop up above USD 1,200 per ounce, gold bulls expect a start of a new uptrend, while gold bears expect a restart of the downtrend when they see USD 1,180 per ounce. Behaviour in other precious metal prices shows a similar pattern. Whereas the picture in platinum prices looks least constructive, that of palladium prices is the most constructive. The main reason for this behaviour is offsetting drivers and uncertainty about the global growth outlook and the start of Fed monetary policy tightening. As soon as uncertainty will start to wane, a direction will become clearer.

More weakness ahead

For the coming months, we anticipate price weakness in precious metals. This is mainly because we expect a higher US dollar and higher US interest rate expectations to lead to further investor position liquidation. We also remain negative on gold for 2016 for the same reasons. But at some point in the coming months, economic fundamentals will come to the rescue and support silver, platinum and palladium prices.