Precious Metals Watch – The higher US yields headache

by: Georgette Boele

In this publication: Gold, silver and platinum prices have dropped considerably since 8 September, mainly because of higher US real yields. Platinum prices have even dropped below palladium prices. In the coming days and weeks, prices could remain under pressure, but we expect gold, silver and platinum prices to rise afterwards and platinum prices to outshine palladium prices

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The rally in gold, silver and platinum prices came to a halt on 8 September mainly because US real yields bottomed out (10y), which has provided support to the US dollar. Since then, platinum and silver prices have dropped by 10%, while gold prices have declined by close to 6%. Moreover, platinum has become cheaper than palladium because palladium is barely affected by developments in US real yields. Indeed, palladium prices closely follow developments in base metal prices as well as the state of the global economy. What do we expect going forward?

Weakness to be temporary

In the coming days and weeks we expect the US dollar to continue to recover, which will probably weigh on gold, silver and platinum prices. As a result, investors will most likely close of some of the net long gold, silver and platinum positions. Gold prices could decline towards USD 1,250 per ounce, which will be close to the 200-day moving average. If prices would break below this level, this year’s rally will be called into question again. This is not our base case scenario though. We expect gold prices to bottom out close to USD 1,250 per ounce and to move higher again. This is because we expect US real yields to edge lower. Moreover, the US dollar recovery is temporary in nature in our view and we expect the US dollar to weaken again at the end of the year and next year. Our year-end gold target is USD 1,300 per ounce and USD 1,450 per ounce at the end of 2018.

For platinum and silver prices the outlook is less convincing than that of gold prices. This is because prices have already moved below their 200-day moving averages again and this has resulted in a more neutral outlook. Silver prices appear to be stuck in a wide USD 15.20 – 18.65 range for now while platinum prices in a USD 890-1,040 range. If US real yields start to come down, the US dollar starts to weaken and gold prices rise again (our base scenario) then platinum and silver prices should also rebound.

Platinum too cheap compared to palladium

On 27 September platinum prices moved below palladium prices. This has not happened since 2001 and it is quite a unique event. Platinum and palladium are precious metals that are both used in autocatalysts. Platinum is mainly used in diesel cars and palladium mainly in gasoline cars. The diesel scandal and the arrival of electric cars have weighed on the outlook for platinum prices. Moreover, market expectations for lower jewellery demand are also more important for platinum than for palladium. Finally, platinum is far more affected by developments in the gold market, the US dollar and US real yields than palladium.

On the other hand, the outlook for palladium looks positive from a fundamental point of view as well as for technical reasons. However, investors are extremely long palladium. If they were to become less positive on the palladium price outlook and start to liquidate their long positions (taking profit), palladium prices could drop to USD 800 per ounce. In short, we think that platinum is cheap and palladium is expensive. We expect the platinum/palladium ratio to rise again.