Precious Metals Weekly – Rout in precious metals

by: Georgette Boele

150708-Precious-Metals-weekly.pdf (212 KB)
  • Silver prices also break out on the downside
  • Cyclical precious metals badly hurt…
  • …while gold is not living up to its safe haven status again



Silver prices also break out on the downside

Silver prices followed palladium and platinum prices in breaking out on the downside. In a brutal move, silver prices dropped yesterday below USD 15 per ounce. The outlook for gold prices has deteriorated sharply, only the support level of USD 1,130 per ounce stands currently in the way in order to avoid a sharp move lower.

Cyclical precious metals badly hurt

Cyclical precious metals have been sold off aggressively this year, especially platinum and palladium. The latter is mainly the result of investors abandoning the precious metal as it has failed to produce higher prices on the market’s view of a substantial supply deficit. In general, the market underestimated the negative impact of investor position liquidation. We have been forecasting lower palladium prices. It took a long time to materialize, but in the end the move has even surprised us on the downside. Our end of September target of USD 650 per ounce (which was also our June target) has been broken easily. Prices have moved in tandem lower with net positions (substantial increase in short positions). If Chinese equities were to fall further and investor sentiment were to deteriorate, palladium prices could reach USD 600 per ounce.

The Greek no-vote and the concerns about China have also weighed on platinum prices. If the situation were to linger on, platinum prices could drop further and this would mean that we were to quickly in becoming positive on platinum.

Gold’s being a safe haven?

The gold market has dramatically changed with the arrival of gold products that opened the market to a wider public. Gold is not only bought as a protection for uncertain times but also as a means to speculate. The latter goes completely against gold’s safe-haven character and at times it more than overshadows it. For example, at the height of the global liquidity crisis (when there was a shortage of liquidity) gold prices dropped sharply because investors valued cash more than gold. This suggests that at times of severe crises, gold could not live up to its safe-haven status. The variation in the gold price has coincided with a buildup and liquidation of outstanding investor positions in gold. This is not a positive development for a safe-haven asset, because significant investor activity could indicate that it is used for speculation rather than as a safe haven.

Recent price action in gold prices points suggests that gold is not living up its safe haven status again. Investor sentiment has deteriorated because of sharp fall in Chinese equities and the Greek debt crisis, but gold prices have gone down instead of up. This is because investors have liquidated precious metals in general, the outlook for Chinese jewellery demand has deteriorated weighing on gold, silver and platinum prices and the US dollar has remained relatively strong. Looking ahead, higher US dollar and higher US rates will push gold prices towards USD 1,000 at the end of this year in our view.