Precious Metals Weekly – A later start?

by: Georgette Boele

Precious-metals-weekly-20-August-2015.pdf (211 KB)
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  • Gold prices rebound because of expectations of a later Fed start…
  • …but we disagree with financial markets…
  • …therefore we see gold price weakness to resume
  • Lower oil prices push down cash costs

Gold prices rebound because of expectations of a later Fed start…

The sentiment in the gold market is improving. The recent shift in China’s FX policy marked a turnaround last week. This week gold prices have continued to rally. A lower dollar certainly helped. However, the main trigger was the release of yesterday’s US inflation report. This showed a smaller increase month-on-month than financial markets had anticipated. Consequently markets now believe that it is less likely that the Fed will raise official rates in September. The FOMC minutes that were released later that day also gave financial markets ammunition to believe that the rate hike will come later. They have resulted in lower Treasury yields, lower expectations about rate hikes and a lower US dollar. This a very positive combination for gold. As long as these expectations dominate in financial markets gold and other precious metals will probably move higher.

…but we disagree with financial markets…

We disagree with the conclusion in financial markets that a Fed rate hike will come later. Since the last FOMC meeting the economy has been showing signs of strong fundamentals. The last labour market report was strong. As a result, slack is diminishing. The impact of the labour market is slowly filtering through to the economy. Retail sales rebounded strongly in July, with upward revisions to June’s sales. Demand for housing is increasing and as a result the US housing market is picking up momentum. This all adds to the picture of an economy growing at above trend rates. We expect “some” further improvement ahead as the gains in the job market continue to support the economy. This is what the Fed wants to see before a rate hike.

…therefore we see gold price weakness to resume

The recent developments have not altered our outlook for precious metal prices. With financial markets now attaching a lower probability to a Fed rate hike in September, the market impact will be more substantial if the Fed decides to hike that month. Then, financial markets will adjust upwards their interest rate hiking expectations for this year and next year. This will spur the US dollar and result in lower gold and other precious metal prices. So we remain confident about our forecasts.

Lower oil prices push down cash costs…

Mining precious metals is very energy intensive. The substantial drop in oil prices (again) will push total cash costs to mine precious metals lower. The quarterly data including Q2 2015 show that total cash costs appear to have peaked and have started to move lower in general. Weakness in oil prices will probably make this trend more pronounced. Lower total cash costs are positive for mining companies. But they also signal that the floor in precious metal prices could be lower, before supply is reduced.

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