Precious Metals Weekly – Gold resumes downtrend

by: Georgette Boele

150720-Precious-Metals-weekly.pdf (93 KB)
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  • Gold prices break lower…
  • …because of a stronger US dollar, Fed rate hike expectations and constructive investor sentiment
  • Our year-end target for gold is USD 1,000 per ounce
  • Gold price weakness drags down other precious metal prices

 

 

Gold breaks below crucial support level

This morning, gold prices broke below crucial support level of 1,130 (previous low), falling to a low of USD 1,090 per ounce (or -4%). Market players often put stop loss orders below important support levels. Hence, when such a level is taken out (like this morning), prices move substantially lower. Monday morning liquidity conditions are generally thin. This also had a considerable impact on the movements this morning. The break lower in gold prices made them the last shoe to drop, meaning it was the last precious metal where the outlook had not turned negative yet. Our target for the end of this year of USD 1,000 per ounce. Our target for the end of September of USD 1,100 per ounce is probably too bullish.

Why have gold prices fallen?

The fall in gold prices has been in the making for some time now. Gold-supportive developments such as a temporary weaker US dollar and the Greek saga were not able to push gold prices higher. Instead, gravity started to be felt and the bottom fell out under prices. Most important dynamics that have contributed to the drop in gold prices are a stronger US dollar, improving investor sentiment in financial markets, and expectations that the US Federal Reserve will start hiking interest rates this year (following a relatively hawkish sounding Fed Chair Yellen). Gold prices have a strong tendency to weaken when the US dollar and 3-month US interest rate expectations rise (see graph on the right).

However, there have been reports that the market was disappointed by the increase of gold holdings by the PBoC. As a result, this was seen as a major contributor of the gold price weakness on Friday. We tend to disagree. Gold prices did not move when the news came out. It only started to move after the US market opened and US data were released (CPI, Housing starts, Building permits). Therefore, gold price weakness is, in our view, mainly the result of a stronger US dollar and Fed rate hike expectations in an overall constructive investor climate.

 

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Gold price weakness drags down other precious metals

The sharp weakness in gold prices also has had a negative impact on other precious metal prices. They all moved lower. However, there are two important developments. First, silver prices are often underperforming if there is general precious metal price weakness. This morning, gold has been the weakest precious metal, while silver has been the strongest. This is because gold prices are leading the move. Second, gold prices have also underperformed platinum prices. This could be a change in trend. We expect platinum prices to outperform gold prices going forward, because of an improving fundamental picture for platinum. However, we had not expected that platinum prices would drop below USD 1,000 per ounce.

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