No QE3 is not necessarily negative for precious metals

The major fundamental drivers for gold and silver had been positive on balance. Nevertheless, gold and silver ended the almost unchanged compared with the close of the preceding Friday. Especially the development in the first half of the week underlines that markets sometimes just react in the opposite way on positive news.

The US economic data came in mostly stronger than the consensus of Wall Street economists had predicted. Normally, positive economic surprises are positive for stock markets and other risky assets. However, during the first half of last week, the US stock market showed hardly any reaction. Currently, stock investors are too fixated on expectations of the Fed announcing soon another round of quantitative easing. What most investors and traders in the US stock market completely ignore is the fact that the monetary policy stance of the Fed is already extremely expansionary. It seems that the market is dominated by the thought that it first would have to get worse before it could get better. They completely deny the possibility that it might already get better after the soft spot in spring and that the worst might already be behind them. As another round of quantitative easing was already priced in, many traders and investors were now disappointed that the FOMC might see no need for further monetary policy measures. Thus, instead of buying stocks on bullish news, they reacted negative on stronger than expected economic data. Later during the trading sessions, losses were pared.

The US bond market, however, reacted in the normal way. As yields on medium- to long-term US Treasury notes and bonds had fallen to historic lows, they backed up and prices fell. Precious metals followed US Treasury paper prices lower as the expectation of QE had been also a supportive factor for gold and silver.

On Thursday, stock markets rallied, but also safe haven government bond markets and precious metals rose. Hopes for monetary stimulus returned into the markets. However, it was not primarily revived hopes for QE3 by the Fed. Instead, the financial and precious metal market got more optimistic on the ECB buying government notes in the secondary market. The trigger for this improved sentiment had been German chancellor Merkel. During her summer vacation, members of her coalition government attacked the ECB and in particular ECB president Draghi for the intention to intervene in the secondary market to bring down yields, and thus, to restore again the functioning of the financial markets, which is essential for the transmission mechanism of monetary policy to the real economy. At a visit in Canada, Mrs. Merkel fully supported the ECB and Mr. Draghi.

The ECB is expected to provide further details of its plan for buying bonds in the secondary market at the next press conference in September. However, the major weakness of the plan presented by Mr. Draghi at the August ECB press conference is its conditionality. Governments are likely to remain hesitant to ask the EFSF for a bailout by buying bonds. Therefore, for the time being, we remain skeptical whether the ECB will intervene anytime soon in the bond markets. However, the ECB might buy peripheral eurozone government bonds in the secondary markets even without a formal request in the case that Greece would decide to leave the eurozone. But in this scenario, bond buying by the ECB is probably not positive for precious metals as they might be dragged down by a sell-off in risky assets.

Thursday was also a turning point for the PGMs. Platinum and palladium rallied on a labor dispute at o mining company Lonmin - one of the world’s top platinum producer - which turned into deadly violence. South Africa accounts for about three quarters of global platinum production. This labor dispute is likely to have a lasting impact on the supply and demand balance. Thus, the PGMs are expected to perform better than gold and silver. This should especially be the case, if the global economic outlook improves again on monetary stimulus measures in Europe and Asia, in particular in China. But both PGMs are still clearly below their highs made in June. Only a break through those resistance levels would open the scope for considerably higher gains.

Gold and silver are expected to stay in recent trading ranges for the time being. However, even if the Fed waits longer with further monetary stimulus measures, the bias is still more towards a break-out to the upside.