Platinum shines strongly among precious metals

Platinum develops better than gold in percentage terms. But whether this is going to continue in the coming weeks and months will depend largely on the development of the automotive industry. The sales figures show strong gains in the first quarter and the results were better than expected. However it is questionable, whether the car shares rise more strongly, as they are already clearly overbought. If auto stocks correct in line with the overall market, then this should also have a negative impact on the relative performance of platinum over gold.

We have in this blog several times already criticized the German Federal Government, in particular Chancellor Angela Merkel, for the policy in the Greece-crisis. The always hesitant attitude and vague statements have given Greece no rest and relaxation on the financial markets, but only exacerbated the crisis further. Also, it was not a smart idea from the Chancellor involving the IMF in a rescue operation for Greece. Fueled by statements of some U.S. economists this has only exacerbated the fear of Greece declaring state bankruptcy. This has weighed on Gold as new lows in the EUR/USD exchange rate are negative for gold. Another negative factor in the previous week was the SEC action against Goldman Sachs, which has reduced the risk appetite of investors and also the precious metals suffered under increasing risk aversion.

The platinum group metals are not spared of the negative developments in the foreign exchange markets. But the industrial use of the PGMs for catalysts in the automotive industry plays also a significant role and at present offsets the impact of the EUR/USD exchange rate. With the start of the global economic crisis in the autumn of 2008, which was triggered by the financial crisis and the bankruptcy of Lehman Brothers, some countries have established incentive programs for the purchase of new cars (scrapping premium in Germany, cash for clunkers in the US). Automotive experts, such as Professor Ferdinand Dudenhoeffer (a “leading German expert”), had criticized such programs as ineffective, indeed even as harmful to the automotive industry. After the expiry of the incentive program, there would be a massive slump in demand for automobiles, which would not only delay the crisis but would even make it more severe.

But it came back a different way than the professorial experts had predicted. Although the sales declined slightly after the expiry of the programs, but in most countries car sales in the autumn of 2009 were higher than the year before. In particular, the car sales have risen considerably in China. This shows the success of the Chinese government’s policy to boost domestic consumption. Thus, even automotive brands, which have benefited little from the incentive programs, could increases car sales significantly. Last week, some automobile companies exceeded expectations considerable and reported surprising results for the first quarter of 2010. This argues for a further advantage of platinum compared to gold in the short run. 

The chart shows the ratio of gold to platinum price. A falling ratio means that platinum performed better than gold that is either increases stronger or decreases slower in percentage terms. In the previous week, this line has reached its lowest level since September 2008. At the same time, this represents a correction to the 61.8% increase from June 2008 to peak in December 2008. This Fibonacci correction is seen from a chart-technical point of view as a critical level. If the ratio of the gold and platinum price could continue to decline, then the low of June 2008 might be reached again as a target, suggesting a still significant potential for better performance of platinum. But in the case that the line does hold at that mark, then gold should receive sufficiently strong support and could perform better. At the same time, the chart shows the price of Daimler shares (other European car shares, with the exception of the Volkswagen Group would show a similar development) with an inverted left-hand scale. It is striking that platinum often performed better than gold when the Daimler share price has increased. After an increase of around 30% in two months, the stock is now clearly overbought. The international stock markets are overbought after two months' rise, too. The risk of a correction in equity markets has therefore increased significantly. And the case of Goldman Sachs shows how nervous investors are and how quickly risk aversion can rise. Falling stock markets, especially in automotive stocks would thus also be a negative signal for platinum, which should then perform worse than gold.

Copper could be due for a correction

When a market is no longer increasing on good news, this is usually a sign of a turnaround. This is the case for copper. In addition, the market doubts whether the fundamentals justify a price of about 8,000$/t. On the last Friday, in the course of the afternoon also the chart-technical situation has changed. Furthermore, also other industrial metals could be drawn down in line with copper.

In China, the largest consumer of copper, GDP in the first quarter of 2010 increased by 11.9%. Although the central bank had taken restrictive measures in January, GDP growth accelerated further. We had noted previously in this blog that increases in minimum reserve requirements and the restriction of credit would only slow down the pace of growth, but the increase in the demand for copper should continue. The message of China's GDP growth would actually be positive for the copper market. But copper has not been able to cross above the threshold of 8,000$/t significantly. In the market, the growth rate has once again raised worries that the copper demand could decline.

A further increase was prevented also by worries that China is deliberately taking measures to cool the property market and to avoid a bubble. This policy is under medium-term aspects positive for the copper market, as it tries to avoid, other than the monetary policy of the Fed, a collapse in demand and achieve a more even level of construction activity in line with demand. It does not mean that the central bank, the Peoples Bank of China, would bring about a slump in construction. However, the short-term demand for copper should be expected to be lower than it would be the case if construction activity would be unbridled.

With the crisis in financial markets in the year 2008, China has fixed the exchange rate of the yuan against the US dollar and now considers a return to a managed floating. This, too, has had a negative effect on the copper price on Friday. The market fears that a revaluation of the yuan, which is to be expected with a controlled floating, although the prices of copper in yuan would cheapen, but China's exports were likely to suffer from a stronger yuan. We consider this argument is not convincing enough. It would only be negative, if China would export all the copper imports after further processing, ie, exports alone would determine the amount of copper imports. With a yuan appreciation copper is also cheaper for domestic consumption and this may be the overall determining factor.

Only on Friday afternoon, copper came but under strong selling pressure. However, the trigger for this has not the least to do with the fundamentals for copper. The news that the U.S. Securities and Exchange Commission brought a fraud action against Goldman Sachs and an employee in connection with the issuance of a CDO in 2007, led to a sharp rise in risk aversion of investors, from which the metals markets were affected. Even gold, which is often regarded as a safe haven, came under massive selling pressure. This change in mood of investors is unlikely to reverse overnight. After copper has traded sideways in the last two weeks, it came to an downside breakout on Friday. Copper could therefore drop further.

In our forecasts for copper prices, we have assumed that the price in the current and also the following quarter would correct lower. However, this decline would not be due to a slump in demand from copper consumers. Rather, we expect that the leading indicators, as the OECD leading indicator showed earlier last week, were rising still, but losing momentum. Financial investors are likely to use this as an opportunity to take profits in base metals. In the case this coincides with a growing risk aversion, then a more pronounced correction in copper and other nonferrous metals might be looming and this, despite the LME warehouse stocks of copper could fall further.

Gold at new high of the year

After the gold price has risen on last Friday to a new annual high, gold could advance further to the next psychological mark of 1,200$/oz. But investors should be cautious. Because it is not the usual fundamental factors that have led to the rise in prices, but because of panic on Greece national debt. If markets return to a sober analysis, then gold could follow the fundamentals and give back the gains.

As stated earlier, the crisis of the high Greek budget deficit is a burden for the euro and is thus negative for the gold price. But it could become a supportive factor once gold is bought up in panic over a bankruptcy. Exactly this situation has occurred in the past week. And with these movements in the markets, two prevailing assumptions have been refuted. When asked during the recent ECB press conference to comment on the market development, ECB chief Trichet replied that the markets were always right. But this is not the case. Central bankers consider themselves infallible. However this statement of Mr. Trichet is obviously not correct. Second, it is often said that information would be processed rationally by the market, and thus academics in their models assume the hypothesis of rational expectations to be confirmed. They were already proofed wrong in the financial crisis and it is not true also in the panic of investors in the past week.

A panic can then be viewed as a rational behavior when it is triggered by new information that is true and leads to a completely new fundamental assessment of the situation. However, if the new information could be easily identified as false, a panic is an irrational behavior. In the case of Greece the panic was triggered by a message from Market News International that according to an unnamed government source, Greece's would refuse to ask the IMF for a loan because of possible conditions, but would try to negotiate a new assistance pact with the EU Heads of States. Greece's Finance Ministry has denied this report, but this has only strengthened the panic in markets. Obviously, the fear of some investors has switched off their brains.

If the markets really process information rationally, they would have quickly classified this message as a hoax and the denial of Greece must be regarded as accurate. The German Federal Government with its rigid stance pushed through an agreement at the summit of EU heads of government on March 25-26, that Greece take a loan from the IMF, before the other EU countries must determine by a unanimous decision the emergency and could grant loans to Greece on market terms. This is the lowest common denominator the various EU states could agree on, and it is not even guaranteed that Greece actually would obtain aid from the EU. For their stance, Chancellor Merkel has received the name Madame No. The attempt to achieve a better result in new negotiations for Greece would be like the battle of Don Quixote against the windmills. And both the Greek Prime Minister and Minister of Finance acting wise enough not to take up this fight. If the market were truly rational, then it should have realized the message of Market News International quickly as a rumor deliberately scattered and it would not have panicked.

Certainly more serious, however, are reports that Greek citizens reduce their deposits with the banks. They have already reduced their deposits within the first two months of 2010 by over EUR 8 billion and this trend has intensified in recent weeks. Part of these funds should have landed on accounts with foreign banks, or held as cash. One part could have flowed also in gold, although there is no hard evidence for this. If you look but to the intraday movements of the gold price, it is noted that physical gold demand in Europe has not had a big influence. The significant movements have occurred with the start of trading in the US. Recent data from the CFTC on the "Commitment of Traders" covers only the positions to Tuesday April 6, the day the panic broke out. But already at that time, the net long position of major speculative addresses increased by almost 30 thousand to 203,446 contracts. It should therefore once again be the hedge funds that have speculated on an escalation of the Greek crisis and a run on gold. With a calming of the situation, they could also reduce their positions again rather quickly.