Precious metals prices on the rise

With only 3 trading days left, it looks like precious metal prices could advance higher for the second consecutive month. However, it appears that among the major fundamental drivers, the stock market is no longer at centre stage. The US dollar and the price of crude oil are currently dominating.

The finance ministers of the eurozone approved on early Tuesday morning, after 12 hours of negotiations, the 130bn euro bailout package for Greece. While this had a positive impact on precious metal prices, the reaction in stock markets was rather muted. Stock market indices initially reacted positive but reversed direction and closed the day lower. Especially fixed-income strategists voiced skepticism that Greece would be able to implement the necessary measures for a bailout and recommended to buy further the safe haven government bonds, which capped the upside for stock markets. The S&P index failed to surpass a major technical resistance level but ended the week slightly higher. However, it could not provide a stronger impulse for precious metals.

Another negative factor for stock markets had been the release of flash estimates of purchasing manager indices. In China, the unofficial PMI compiled by Markit for HSBC rose from 48.8 to 49.7 in February. The financial and commodity markets were disappointed that this index remained below the 50 mark. However, what is more important is the direction of the PMI and it points in the right direction. Furthermore, regressing industrial production on purchasing manager indices shows that the 50 mark is not set in stone as the sharp distinction between contraction and expansion. Even at readings slightly below 50 of the manufacturing PMI, industrial production could nevertheless increase. In the eurozone, the flash estimate also showed an increase of the manufacturing PMI; however, it remained below consensus forecasts. The service sector PMI surprised by a drop while the consensus of economists was looking for an increase.

The German ifo index posted a surprisingly strong increase exceeding market expectations. However, it could not provide a stronger impulse for stock markets. The reason had been the release of the GDP forecasts of the EU Commission, which took place only shortly after the ifo institute published its index. The EU now expects the eurozone to be in a recession this year with a slight contraction of GDP. However, this should not come as a surprise as the ECB already argued with a recession in the eurozone for the two rate cuts in November and December 2011. The reaction in stock markets just demonstrates that markets are not always information efficient.

Since late January, the price of crude oil is rising. The price of the nearby Brent future rose by more than 5$/bbl last week and closed above 125$/bbl. The reason for the rally in the oil market is the embargo of Western countries against Iran. Last weekend, the regime in Tehran announced to stop immediately oil deliveries to France and the UK. As Iran also threatens to close the Strait of Hormuz, crude oil prices could rise even further. The price development of crude oil adds to concerns about a slow-down of global economic activity. However, currently, the impact of crude oil prices on consumer and producer prices is a stronger factor for precious metal prices than the possible negative impact on economic activity, which would hit more the metals with a higher industrial use.

The second long-term repurchase operation (LTRO) of the ECB, which will take place next Wednesday, February 29, has lifted the euro versus the US dollar. The ECB will provide again funds for three years and the markets expect a strong demand from banks in the eurozone. The first LTRO already contributed to an easing of the debt crisis in the eurozone. Yields on Italian and Spanish debt came down and this development continued also last week. With the injection of further liquidity, banks are expected to purchase further government bonds in the eurozone. If further progress will be made with respect to the bailout of Greece, the euro might firm further against the US dollar, which would be another positive factor for precious and base metal prices.

As gold consolidated and traded sideways during most time this month, the recent rise has not led to an overbought market. Therefore, the advance starting this week could continue into the next month. Nevertheless, the stock markets could spoil the party for gold bulls. Therefore, we would stay long but keep tight trailing stops to protect positions.