US Dollar again a supportive factor for precious metals

In the previous blog article, we discussed the temporary divergence between the US dollar and the price of gold. This week, the US dollar had been again a supportive factor contributing to strong gains of the precious metals compared with the previous week close.

At the time of writing this article, Greece has not yet reached a deal with its private creditors. However, Reuters reported that the Hellenic Republic would be close to reach an agreement, which would imply a debt reduction by 60 – 70%. Such a volunteer agreement might provide further support for the euro. However, it remains still unclear whether a sufficient percentage of private investors would accept such a deal. It has been reported that some hedge funds insist on being fully compensated, either by Greece or by the CDS bought. Greece on the other hand still has the option to pass a law that introduces a collective action clause, which would make an agreement with the majority of the bond holders binding also for those bond holders, which did not accept the deal. However, the rating agencies already announced that imposing a collective action clause would imply that the deal is not a voluntary but a forced agreement and thus, would be regarded as a default. But for triggering the credit event for the CDS, it is the decision of the ISMA, which is relevant. Nevertheless, even in the case that Greece is reaching a deal, there are still some stumbling blocks on the road for a recovery of the euro. Even some set-backs can not be ruled out. But in the case of a positive development, the euro might contribute further to rising prices of precious metals.

Another supportive factor had been auctions taking place last week after the downgrades by S&P. France and Spain met strong demand at their auctions and could place the paper at lower yields compared with preceding auctions. Thus, the downgrade, which had been already widely priced in, did not worsen the funding situation in the eurozone. Next month, the ECB will provide banks again with 3year funds, which should ease the tensions in the government bond markets further.

The ZEW indicators for Germany and the eurozone are based on a survey. However, unlike the PMI indices, these diffusion indices are based on surveys of fund managers and analysts at financial institutions. Therefore, the ZEW indicator is less reliable for indicating turning points of economic activity. The ZEW indicator is far more influenced by the recent movements in stock markets. Another feature of this indicator is that some of those polled by the ZEW also provide forecasts for this index. However, the economists often underestimate the magnitude of index changes. This had also been the case last week. The ZEW indices rebounded far stronger than the consensus of economists predicted. This was positive for the precious metals via two channels. On the one hand, it contributed to the recovery of the euro and on the other hand, it also contributed to further rising stock markets.

As in the week before, stock markets had again a positive impact on precious metal prices. Beside the ZEW indicator, also the Chinese GDP in the final quarter of last year contributed to rising stock market indices. The Chinese GDP growth at 8.9% was less than in the preceding quarter (9.1%), but it was stronger than the consensus forecast. This positive surprise reduced the fears of a global recession to some extent. Also US economic data contributed to the further increase of the S&P 500 index, which was positive for precious metals. After the strong rise of stock markets at the start of 2012, the markets are now overbought from a technical perspective. Thus, it could not be ruled out that stock markets enter a consolidation, which would also be a negative factor for gold and other precious metals.

Gold is facing some technical resistance in the range of 1,670 – 1,675$/oz, some reaction lows from late November last year. Taking out this resistance requires support from the fundamental drivers. The technical situation of crude oil already turned negative despite the geo-political tensions. The stock markets are in an upward trend, but vulnerable for a consolidation. The recovery of the euro against the US dollar might continue, however, the risk of a set-back due to the developments within the eurozone should not be neglected. Furthermore, also the technical situation of the precious metals is overbought. Therefore, the risk of failing to take out the resistance zone appears to overweigh the chance for a further rally. Thus, holders of long positions should tighten their stops.