Precious Metal Weekly – Platinum to win over gold

by: Georgette Boele

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  • The improvement in investor sentiment hurt gold and silver and supported palladium
  • Platinum remains our favourite precious metal…
  • …while we expect gold prices to continue to fall

Impact of a Greek deal on precious metals

On Monday, the news about a deal between Greece and its creditors resulted in an improvement in overall investor sentiment. This supported the US dollar across the board, because the market focus shifted again from Greece to monetary policy divergence. Last Friday, Fed’s Yellen made it clear that rates hikes are on the cards this year. We expect the Fed to start hiking rates in September, followed by another hike in December. Currently, financial markets anticipate only one rate hike this year.

In addition, the improvement in overall investor sentiment has resulted in lower demand for safe haven assets, such as the Japanese yen, the Swiss franc and to a lesser extent gold and silver. Thus prices of these assets have come under pressure.

Why have investors remained cautious?

There are two major reasons for this. For a start, incoming US economic data have been on the weak side, most notably US retail sales. This has weighed on the outlook for possible rate hikes this year, and consequently the US dollar. In addition, national parliaments still need to approve the Greek deal. Today it has to be approved by the Greek Parliament, while the German Bundestag will vote on Friday. So, significant risks remain (see also our note on the Greek deal).This will prevent investors from becoming fully risk seeking. However, this morning, Chinese GDP came in a touch better, which should have calmed fears about a hard landing in China.

Platinum to remain our preferred precious metal…

We stick to our view that platinum prices have fallen enough and that they should start rising again. For a start, fundamentals have been improving, despite the Greek saga. Indeed, we expect that a Grexit will only have limited impact on the eurozone economy, which is a crucial market for platinum auto catalyst demand. In addition, Chinese authorities will do whatever it takes to avoid a hard landing in China. As such, we remain constructive about Chinese jewellery demand for platinum, gold and silver. Last but not least, speculators have increasingly taken short platinum positions, while the gold/platinum ratio is at extreme high levels. We see this as an opportunity to position for outperformance of platinum versus gold, as we expect this ratio to drop substantially.

…and gold to be out of favour

A substantial drop in the gold/platinum ratio will not only stem from platinum prices moving higher, but also because we expect gold prices to decline. A stronger US dollar and higher US interest rates will push gold prices towards USD 1,000 at the end of this year in our view. This will be the result of investors liquidating positions. If Fed’s Yellen were to continue to sound somewhat hawkish tomorrow, gold prices could break crucial support level at USD 1,130 per ounce.

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