Rebound could be only a dead cat bounce

Last week, we wrote that precious metals might rebound. And indeed, precious metals came back. Gold and palladium even closed higher than at the previous Friday. Silver and platinum pared most of the losses suffered earlier last week. Thus, one might argue that the forecast was right. However, it was right for the wrong reason. Therefore, while the recovery of precious metal prices had been strong, it might be short-lived. The risk to the downside is still considerable.

The conclusion that precious metals might rebound was based on political factors. At the time of writing the previous article, news agencies reported that Greece had found a new government after the first round of talks with Greek president Popoulias took place. In this case, a recovery of the euro versus the US dollar was likely. Also stock markets were probably moving higher paring some of the losses occurred during the preceding week. These were favorable factors for the precious metal markets. However, the reports of forming a new government in Greece were based on a statement by the left-wing party leader, Mr. Tsipras, which turned out to be a lie and defamation of other parties.

Even the negotiations of Greek president Popoulias to form a new government failed. Greece is now governed by a care-taker administration and a snap election will be held on June 17. During this period, financial and commodity markets are likely to remain jittery about the result of this election. Unfortunately, statements by politicians of other eurozone countries, the EU and ECB council members increase the nervousness among investors and traders. Reports about preparing for an euro exit of Greece are counterproductive.

There were reports in the media, that eurozone finance ministers threatened to kick Greece out of the eurozone. Those who insist that Greece has to fulfill the treaties want to breach the Lisbon Treaty! There are no provisions in the treaty to leave the euro and other finance ministers can not expel Greece out of the euro. Only Greece can decide to leave the euro, but this would also imply to leave the EU. According to latest polls, roughly 80% of the Greek population wants to keep the euro.

Also statements from media reporters and strategists or investment fund managers that Greek has to leave the eurozone are not correct, even if repeated several times within one hour at TV stations like CNBC or Bloomberg.

But not only Greece, also Spain remains in the spotlight. The downgrade of 16 Spanish banks by Moody’s increases the fears that the Spanish government would have to increase the deficit in order to bail out banks suffering under declining real estate prices. This also weighs on the euro versus other major currencies.

The rebound of precious metals set in after the release of the latest FOMC minutes. The sentence “Several members indicated that additional monetary policy accommodation could be necessary if the economic recovery lost momentum or the downside risks to the forecast became great enough” was interpreted as an indication the Fed would embark on QE3. However, the crucial part of this sentence is the if-clause. The recent US economic data does not indicate that the requirements for additional monetary policy accommodation are fulfilled. We pointed out that the Easter holiday might have an impact on monthly data, which had been distorted even more by the seasonal adjustment factors. The latest initial jobless claims are stable and do not indicate a worsening of the labor market situation.

Thus, the recovery of precious metal prices based on hopes for more monetary easing in the US might be short-lived. The worries about a potential Greek bankruptcy prevail until the election on June 17 or even beyond that date depending on the election result. The downside risk remains considerable. Those, who want to enter long positions, are recommended to buy some downside protection also.