Precious Metals Weekly – Gold as risky asset?

by: Georgette Boele

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Gold behaves as a risky asset, but it is mainly a US dollar move…
Gold has been the best performing precious metal this week but this rally will unlikely continue…
…while the palladium price rally has lost momentum

 

Gold as a risky asset?

For some gold bulls, the unimaginable thing happened. Recently, gold prices have behaved as a risky asset. The behaviour of gold prices already changed at the end of September, but on 2 October it became clear. What was the trigger for this change in behaviour? In short, the weaker-than-expected US employment report. This has resulted in the further pricing out of Fed rate hikes, which has improved overall investor sentiment and has pushed the US dollar lower. Often better investor sentiment is negative for gold prices. However, this is not the case if it coincides with lower expectations on US interest rates and a lower US dollar. The latter two forces are more dominant for gold prices. The US dollar currently behaves as a cyclical currency where the state of the US economy and interest rate expectations are the crucial drivers. Both these forces have been negative for the US dollar lately. Therefore, the US dollar has moved lower across the board including versus precious metals. Gold prices appear to have behaved as a risky asset, whereas while in fact its price has mainly been supported by US dollar weakness.

Gold best performing precious metal this week…

Gold prices have been the strongest performing precious metal so far this week with platinum not far behind as explained above. Gold’s fortunes are the most closely linked to the sentiment on the US dollar. We expect the US dollar to remain under pressure in the near-term unless US economic data surprise to the upside. It is unlikely that the risk-on environment will continue to support gold prices. The futures markets has priced out a Fed rate hike this year while according to the options market there still is small possibility. According to our scenario, at some point in time, a Fed rate hike this year is completely priced out and this is the moment that the US dollar could start to recover also versus gold prices. In such an environment, resilient US data in constructive investor sentiment will likely be US dollar supportive and hence gold negative. We expect gold prices to move back to USD 1,100 per ounce this year once the US dollar recovers somewhat.

…while palladium being the weakest

In the period that the emission scandal hit the news until last Friday, palladium prices rallied by more than 17% versus the US dollar. This was not only the result of expectations of future higher demand for palladium autocatalysts but also the impact of a weaker US dollar (see above). Since Friday, sentiment has turned somewhat. There are some reasons for this. First, there has been some deterioration in investor sentiment and palladium is the precious metal that is the most negatively affected by this. Second, Chinese and German economic data have come in below expectations. Third, investors have taken a step back and moderated their bullish stance on palladium.

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