Diverging price moves among precious metals

The major fundamental factors for the development of the precious metals had been positive. The S&P 500 index and the price of crude oil posted stronger gains in the weekly comparison. The US dollar index increased only slightly, which indicates a marginally firmer US dollar. However, this would normally been overcompensated by the gains of the stock market and the oil price. Nevertheless, only gold could profit from the positive fundamentals while the other precious metals ended the week with a loss compared to the previous weekly close. The precious metals with a stronger industrial use had been dragged lower by falling prices of base metals. The LME metals index plunged by 4.1% last week.

Various market reports cited one reason for the fall in base metal prices, the uncertainty about the bailout of Greece. Eurozone finance ministers already postponed a decision on the 130bn euro package the week before. Last week on Tuesday, the summit scheduled to take place on the following Wednesday was postponed again and should now be held on Monday, February 20. Nerves of already jittery investors had been strained further by reports that Germany and the Netherlands intend to hold back a final decision on the bailout package until after the Greek general election in April. Germany is playing with fire if it blocks a final approval of the package at the meeting of eurozone finance ministers at the meeting tomorrow.

We fully agree with George Soros that Germany’s crisis management is leading Europe to disaster. We also wrote about this subject several times in this blog and thus, there is no need to repeat the assessment again. However, the further development of precious metal prices will depend on solving the debt crisis. A final approval of the Greek bailout package would be positive for precious metals. Any further delay of the decision, in particular after the Greek elections in April, would be negative for the euro and stock markets, which would drag precious metals down. Unlike last week, gold would probably not escape a downward move in the case that eurozone finance ministers fail to fully approve the bailout package at their meeting tomorrow.

Flow of funds data provides a first warning signal that institutional investors might get more pessimistic on the short-term outlook for gold and take profits. Since the end of last year, large speculators have increased their net long positions in gold futures in every week according to the CFTC report on the “Commitment of Traders”. However, in the week ending February 14, they reduced the net long position for the first time. It declined from 177,507 by more than 10,000 contracts to 167,420 contracts. The decline of the net long position was not only the result of closing longs but also of adding to short positions. But on the other hand, holding in the biggest ETF, the SPDR Gold Trust, increased further last week by 2.6 tons to 1,281.3 tons.

After the release of SEC data, some commentators came to the conclusion that John Paulson would turn negative on gold. His hedge fund has reduced holdings in the SPDR Gold Trust also in the final quarter. However, we don’t share this view. It is well known, that John Paulson had to sell holdings in the gold ETF to raise cash in the third quarter of last year. This operation probably had continued into the fourth quarter of 2011. Nevertheless, one should always keep in mind that once a major market player is forced to liquidate his position or turns bearish, gold and other precious metals could drop despite fundamentals still look positive.