Rally in precious metals ran out of steam as the US dollar recovered on Fed comments
Palladium prices outperformed while platinum was the weakest precious metal
Platinum/palladium divergence to stay for now and higher US dollar to weigh
Why did the rally in gold ran out of steam?
Gold and other precious metal prices received support after the dovish-sounding Fed. However, their rallies quickly ran out of steam mainly because of a resurgence of the US dollar. Since the meeting, FOMC members have clearly expressed that last week’s outcome was a close call and that a lift-off this year remains likely. This has given a boost to the US dollar. USD/JPY is back above 120, EUR/USD dropped to the low 1.11s (more than 3.5 cent lower than Friday’s high). Unsurprisingly, gold and silver prices have also moved lower. However, weakness in equity markets has protected the downside somewhat.
Why did palladium prices outperform?
Palladium has been the only precious metal beating the US dollar so far this week. The main question is why? Palladium is by nature the precious metal that is most exposed to the global economy especially the US and emerging markets. It is mainly used in catalytic converters in engines for gasoline cars. Since the Fed meeting, different forces have been opposing each other. One the one hand, the strength of the US economy has been a positive factor, while a stronger US dollar and weaker outlook for emerging market economies have weighed on palladium prices.
An extra dynamic has been added to this field of forces, namely the diesel scandal. A scheme intended to dupe regulators and consumers about emissions of diesel engines installed in cars has come to the front. If consumers lose confidence in diesel cars, this will have a substantial impact on future platinum demand. We suspect that as a result of these expectations, platinum prices have fallen more substantially than other precious metals this week. On the other hand, consumers may shift to gasoline cars where mainly palladium is used in catalytic converters in engines. Such expectations could have supported palladium prices and have resulted in palladium prices outperforming other precious metals.
Divergence to stay for now and higher USD to weigh
It is likely that the divergence between platinum and palladium prices in the near-term will continue as long as more details about this scandal are released. As a result, palladium prices will likely move further away from our year-end call of USD 525 per ounce. In contrast, stronger US data releases and expectations of a Fed rate hike in December should weigh on precious metal prices, especially gold and silver prices. We see more downside in gold, silver and platinum prices in the near-term. The outlook for gold prices will remain negative for 2016 in our view. The prospect of a Fed lift-off, higher US dollar and improvement in investor sentiment remain negative factors.