Precious metals consolidate recent gains

According to data from ThomsonReuters, gold and silver ended the trading week around the levels of the previous week, while the PGMs came under some stronger pressure with losses of more than 3%. The performance of gold and silver is remarkable as the major fundamental drivers were all negative. This indicates that among the precious metals complex, gold and silver are likely to perform well during the final quarter of this year while the PGMs might lag behind.

After the implementation of QE3, the increase of risk appetite did not last long. The turnaround towards buying the safe haven government bonds was triggered by Asian investors. After markets were closed in Tokyo on Monday, Japanese investors were buying US Treasuries on bargain hunting. Also the geo-political tensions between China and Japan increased the appeal of US Treasuries as a safe haven. Some commentators argued that the increase of inflation expectations was overdone and thus, US government bonds were an attractive investment. Last week, we wrote that fears of a strong rise of inflation rates were overdone. However, this does not imply that US Treasuries are an attractive investment at current levels. As long as nominal yields are below the inflation rate, investing in conventional US Treasuries destroys wealth in real-terms.

We also regard the recent movement of the spread between yields on conventional and inflation-linked US Treasuries not as overdone. Furthermore, it is also not contradicting our assessment that QE3 is currently not inflationary. Nevertheless, if QE3 will be successful, an increase of GDP growth could have an impact energy prices. A change in relative prices could lead to an increase of head-line CPI inflation above 2% while core CPI inflation remains well behaved. However, for an investment in bonds with fixed nominal coupons and redemption, it is the overall price development that matters. This is again an argument against investing in conventional US Treasury paper, UK Gilts or German Bunds as long as yields are below inflation rates.

However, last week, crude oil prices came under strong pressure after having rallied the weeks before on hopes for QE3. On Monday, Brent and WTI futures at the ICE and NYMEX exchanges plunged more than 3$/bbl within a minute without any obvious reason. During the course of the week, crude oil prices came under further pressure as Saudi-Arabia has been reported to pump around 10 million bpd to bring crude oil prices below 100 dollar. Another negative factor for the price of crude oil had been the weekly EIA report on US oil inventories showing a strong build of 8.5 million barrels while the market consensus expected a draw of 0.2 million barrels. As a result, the front-month light crude oil future at the NYMEX lost more than 6% and fell by more than 6 dollar from 99 to 9s.89$/bbl.

In the eurozone, buying the German bunds as safe haven got also support from traders losing patience with Spain hesitating to apply for a full bail-out, which would pave the way for the ECB to buy Spanish government paper up to maturities of 3 years. We argued that the disadvantages of the ECB’s OMT program are the strings attached. The conditionality of applying for a bail-out by the EFSF/ESM will deter governments to seek for financial help, especially, if the conditions are not known in advance. Thus, the hesitation of the Spanish government is fully understandable. Nevertheless, it is also not very rational to sell now Spanish government bonds and notes as Spain could apply anytime for a bail-out. Fading hopes that Spain would apply for a bail-out did not only lead to a decline of yields on safe haven German bonds at the longer end of the curve, but also the euro pared some of the gains made in the week before. Thus, also a firmer US dollar was a negative factor for the precious metals.

Stock markets were not only affected by the renewed wave of buying safe haven government bonds, but also by some economic data. In China, the PMI compiled by Markit increased from revised 47.6 to 47.8 but the market was disappointed by the fact that this index remained below the 50 threshold level. However, turnarounds do not occur as spikes but are gradual improvements. A change in the direction is the more important indication for the economic outlook. In Germany, the ZEW index came in better that expected. Nevertheless, the stock market was disappointed as the assessment of the current situation did not improve. But usually the expectations increase first and later also the assessment of the current situation increases. The expectations are the leading indicator and should be emphasized more than current business conditions. In the Eurozone, the flash estimates of the PMIs were also weighing on stock markets. In Germany, the PMI for the service and the manufacturing sector increased both surprisingly. However, even a bigger surprise was the plunge of the two PMI indices in France. The overall estimate for the eurozone showed an increase in the manufacturing sector but a drop in the service sector. However, the development of the French indices dominated sentiment. While European stock markets ended mixed, all the major US stock indices ended the week negative, which was another burden for precious metals. Beside the PMIs, also the outlook for the European automobile market given by the CEO of the German car company Daimler weighed on the PGMs.

Positive were the flow of funds data. Large speculators increased their net long position further by 9,099 to 191,115 contracts, according to the weekly CFTC report on the ‘Commitment of Traders’. For silver, the net-long position of non-commercials rose by more than 1,000 to 32,555 contracts. The holdings of the biggest gold ETF - the SPDR Gold Trust - increased by more than 16 tons to 1,317.76 tons during the past week. The silver holdings in the iShare Silver ETF increased by almost 200 tons to 9,940.66 tons.

The decisions taken by the ECB and the Fed in September pave the way for an economic recovery in the eurozone and stronger GDP growth in the US. If eurozone politicians do not counteract by imposing more severe fiscal austerity measures, the situation in the eurozone could improve. This would also be positive for other parts of the world. Stronger global economic growth would be positive for precious metals, not by a strong pick-up of inflation, but by increasing the risk appetite of investors.