Precious Metals Weekly – Fed lift-off started

by: Georgette Boele

151217-Precious-metals-weekly.pdf (219 KB)
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– Cyclical precious metal prices are holding up well
– The start of the Fed rate hiking cycle is out of the way…
– …but position liquidation by investors will likely continue because of higher US rates and a stronger dollar

Cyclical precious metal prices are holding up

This week has been a positive one for cyclical precious metal prices, especially platinum and palladium (+2.5%, and +2.9% respectively). There are several reasons for this. For a start, economic data from China came in above market consensus and this supported sentiment somewhat. Also eurozone data were strong. This has improved the outlook for industrial platinum and palladium demand somewhat. In addition, eurozone new car registrations jumped 13.7% in November. Recently Chinese car sales also showed a pickup. These are signs that car sales demand is picking up which is supportive for autocatalyst demand. The fact that lower oil prices did not have a long-lasting impact on cyclical precious metal prices may be a signal that the downside is limited for now.

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The start of the Fed rate hike cycle out of the way…

Yesterday, the US Federal Reserve hiked interest rates by 25bp and delivered a dovish statement. This was widely expected. After the decision and during the press conference, the US dollar and precious metals were volatile. Fed Chair Yellen’s confidence in the strength of the US economy supported the US dollar in the end. This also resulted in lower precious metal prices, especially platinum and palladium prices. This was partly due to the stronger US dollar and partly due to the fact that current prices are seen as an opportunity to position for price weakness ahead.

…and weakness in the months ahead

In the coming days and weeks, the downside in precious metal prices may be limited due to low activity as a result of Christmas and New Year. We expect the start of 2016 to be negative for precious metal prices. It is likely that investors will continue to liquidate positions in the months ahead because of a higher US dollar and higher US rates. As a result, new lows in prices could be reached before the end of the first quarter of 2016. We expect gold prices to break below USD 1,000 per ounce in the coming months. Silver prices could drop to USD 13.5 per ounce while platinum and palladium prices could drop below USD 800 per ounce and USD 500 per ounce, respectively.

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