Precious Metals Weekly – First shoe to drop

by: Georgette Boele

150617-Precious-Metals-weekly.pdf (259 KB)
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  • Platinum prices break lower, mainly because of a deterioration in eurozone investor sentiment
  • Gold/platinum ratio near extreme levels…
  • …signaling that relative underperformance of platinum is not here to stay

 

 

 

First shoe to drop; platinum prices break lower

Platinum prices are the first precious metal prices that have fallen out of the trading range. We expect other precious metal prices to follow. Platinum prices broke below the previous low and there are no major support levels except the 2008 low just below USD 800 per ounce. This signals that prices could fall further.

What has caused this movement?

In general, a deterioration in investor sentiment, more specifically eurozone sentiment, has had a pronounced negative impact on platinum prices (see graph below). Platinum prices have the tendency to weaken when equity volatility increases and equity markets weaken. In addition, the widening of eurozone periphery spreads also signal a deterioration in sentiment. This is because of the stand-off between Greece and its creditors. Despite our view that there will be an agreement between, the risk of a Greek “accident” (default or even Greek exit) is increasing. This weighs on the economic outlook and sentiment of the eurozone. For platinum, eurozone demand accounts for 40% of its annual catalyst demand.

 

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Investors have been liquidating

The weakening sentiment towards platinum is also reflected in the latest speculative net-positioning (up to last Tuesday). As the graph below shows, investors have reduced net-positions in platinum. Even though net-positions have been reduced significantly, total ETF positions are still sizeable. Therefore, further position liquidation could weigh on platinum prices in the near-term.

 

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Gold/platinum ratio near extreme

The considerable underperformance of platinum prices among precious metal prices has pushed the gold/platinum ratio up to near-extreme levels. This situation is unsustainable in our view. The relative weak price will make platinum attractive as a substitute for white gold in jewellery. In addition, more optimistic news about Greece, a higher US dollar and higher US interest rates should result in platinum outperforming gold, because gold has a higher sensitivity to the latter two.

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