Testing support – gold and silver likely to follow the PGMs

All precious metals test support at the lows of the preceding week. While gold and silver managed to rebound, the platinum group metals made new lows on the current downward move. On Friday, all four metals recovered but closed lower in the weekly comparison. This recovery is probably more the result of position squaring ahead of the longer weekend with a holiday on Monday in the US and some European countries. The main factors, which pulled precious metals and other commodities lower, are still in place. Therefore, also gold and silver might break through technical support.

The US stock market was a supporting factor this week for precious metals. Several times, the S&P 500 index managed to pare losses in the afternoon. Furthermore, the S&P 500 index ended the week higher. Nevertheless, this was not sufficient to push precious metals higher. The negative impact of a stronger US dollar more than compensated the support from the US stock market. Especially the euro weakened further against the US dollar. While the euro fell to a 22 months low against the US dollar, precious metals prices recovered. However, this diverging development could be more attributed to closing short positions by hedge funds ahead of the weekend. But one has to notice that also the decline of the net long positions in Comex gold futures held by large speculators came to a halt. In the week ending May 22, the non-commercials increased the net long position by around 1,000 contracts to 115,151 contracts. Also holdings in the SPDR Gold Trust ETF increased again slightly at the end of the week, following a bigger drop earlier last week.

Nevertheless, we remain skeptical that precious metals have already found a bottom and will trade higher. The factors weighing on the euro are still in place. Thus, a further strengthening of the US dollar has to be expected, which would probably push precious metal prices lower.

The first factor is of course the situation in Greece and the fear of Greece leaving the euro. We have already pointed out earlier that the EU treaty has no provision for exiting the single currency. Thus, other eurozone member countries can not kick Greece out of the euro. Only Greece can decide to leave the euro, but this could imply that Greece would have to leave the EU too in this case. Thus, not even the radical left-wing party Syriza intends to re-introduce the Drachma. Nevertheless, some politicians still voice in public the demand to force Greece out of the euro. In addition, the more members of various governments in the eurozone, the EU administration or central banks of the ECB system talk about a Plan B for the case of a Greek exit, the more financial markets regard this case as the most likely scenario. Each statement about a possible Greek exit sent the euro lower versus the US dollar. It can not be expected that politicians or civil servants in EU institutions will keep their mouth shut. Thus, the euro might weaken further until the Greece elections taking place on June 17.

The second factor is the situation in Spain and its banking sector. Last Friday, the autonomous province of Catalonia sent a plea to the central government for financial help. As capital markets currently do not work properly, the government of Catalonia could not obtain funds. If the central government will borrow funds in capital markets and hand the means to the regional governments, the total public sector deficit would not be affected. Nevertheless, as the plea was made public, already jittery investors sold the euro, European stock markets turned negative and Spanish as well as Italian government bonds gave back their gains and yields rose again. The flight to save havens sent yields on German Bunds to record lows. Also the precious metals traded lower before rising later on position squaring. Thus, beside the capitalization of Spanish banks and the write-offs on mortgage loans, the funding of Spanish regional governments is another concern, which might weaken the euro further.

As long as the euro has not found a bottom against the US dollar, the risk for precious metal prices remains to be biased to the down-side. Support for gold and silver, which has held so far, might give way to lower prices at the next test. However, in the case that support should hold on a third attack, the odds would increase that gold and silver might rebound significantly.