Precious Metals Watch – Time for weakness

by: Georgette Boele

In this publication:  Precious metal prices bottomed out on 11 July and recovered sharply. Lower US real yields and a lower US dollar were the usual suspects. Gold prices approached the top of the USD 1,200 to 1,300 range, but then the move has lost momentum. We expect first weakness in prices before another test of USD 1,300.

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Introduction

Since 11 July precious metal prices have risen between 5 to 9%. US real yields (nominal yields corrected for inflation expectations) have been in the driver seat again as well as a weaker US dollar. After 10 July US real yields softened, probably as a result of lower than expected US economic data. If higher US real yields did not support the US dollar because yields elsewhere went up at a higher pace, lower US real yields are certainly not supportive for the US dollar. As a result, US real yields and the US dollar aligned again in terms of direction (lower), sending precious metal prices higher. Gold prices moved from the lower border of the USD 1,200 to USD 1,300 per ounce trading range to the upper border. The deterioration in investor sentiment because of the higher tensions concerning North Korea has also supported gold prices.

Time for weakness

We expect gold prices to move towards the lower border of the trading range (1,200-1,300) again in the coming weeks for the following reasons. For a start, we expect the US dollar to recover somewhat. Stronger-than-expected US data have started to have a positive impact on the US dollar again. The positioning of the US dollar in the futures market may be around neutral but positioning in other currencies such as the euro is extreme. Some profit taking in the euro will indirectly support the US dollar. Moreover, we continue to expect the Fed to hike more than financial markets currently anticipate. This will probably result in higher US nominal and real yields, weighing on gold and other precious metal prices. Furthermore, we don’t expect a full-blown crisis concerning North Korea. Therefore, safe-haven demand for gold and to a lesser extent silver and platinum will probably ease. Finally, gold prices are moving within a USD 1,200 to 1,300 per ounce range. Gold prices have now tried three times to break out on the up side. However, without success. It is likely that gold prices will first move lower before investors try once more to push it beyond USD 1,300 per ounce level and force a break. A sharp US dollar sell-off (from current levels, this year) and an escalation of the tensions concerning North Korea will probably result in gold prices breaking higher. However, this is not our base case scenario.