Precious Metals weekly – New lows

by: Georgette Boele

151118-Precious-metals-weekly.pdf (213 KB)
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  • New lows in gold and platinum prices…
  • …mainly because Fed rate hike expectations and the higher US dollar
  • We expect lower prices ahead but the move will likely be dampened by higher jewellery and industrial demand

Sharp declines in precious metal prices

Since the Fed meeting of 28 October, precious metal prices have fallen between 9 and 20% (see graph below). This is substantial. The increasing expectation a Fed rate increase at the 16 December meeting has pushed precious metal prices lower and the US dollar higher. This price action in precious metals should not come as a surprise as it is widely accepted that rate hike expectations and the direction in the US dollar are important drivers for gold and other precious metal prices.

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The main question is how low can prices go? Gold and platinum prices have already broken below this year’s price lows. Meanwhile, silver prices are just hoovering above the previous low, while palladium prices are on their way to test and most likely clear this year’s low just below USD 530 per ounce. The 33% jump in probability of a Fed rate hike in December has coincided with the price action in the graph above. If the Fed rate hike probability is the only factor driving precious metal prices (which is unlikely) another 34% increase to 100% (fully priced in) could cause similar price reactions. This would mean that platinum prices would drop to USD 710 per ounce, palladium to USD 435, silver to USD 12.4 and gold prices to USD 975 per ounce. This would be reflected by the continuation of substantial investment position liquidation. However, low prices will also trigger action on the demand side. A pick-up in jewellery demand and an overall improvement in industrial demand should dampen the downside in precious metal prices.

In short, we expect considerable price weakness ahead because of investor position liquidation. We expect new lows in all precious metal prices and the downside risks to our 2015 year-end forecasts have increased. However, higher jewellery and industrial demand should dampen the downside in prices to some extent.

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